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Capital Market Pressures and Earnings Management: Evidence from U.S. Dual-Class Firms
Feng Chen,
University Of Toronto
ABSTRACT. In a dual-class share structure, one class of common stock typically has more votes per share than the other, but both classes have equal or similar cash flow rights per share. While dual-class structures potentially foster managerial entrenchment, they may also reduce capital market pressures on managers at dual-class firms. In this study, I examine earnings management behavior among dual-class firms relative to matched single-class firms. I find that dual-class firms report a lower level of abnormal accruals, are less likely to produce small positive earnings surprises, and are less likely to release hidden earnings reserves. The results support the hypothesis that reduced capital market capital pressures lead to less short-term earnings manipulation among dual-class firms.
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