Dual-class versus single-class firms: information asymmetry

Abstract

I examine information asymmetry in dual-class firms in general and when they need (do not need) additional external capital. In general the results show that dual-class firms have higher information asymmetry than single-class firms. When dual-class firms need additional external financing, the gap in information asymmetry between dual-class firms and single class firms is narrower. I find that as the need of additional external capital increases, the difference in information asymmetry between dual-class and single-class firms decreases (consistent with increased disclosures). It decreases, up to a point that there is no difference in information asymmetry with single-class firms that also needs additional external capital. When using adverse selection component of bid-ask spread, the paper finds that as the need of external financing gets high, dual-class firms show lower information asymmetry 1 year before they need additional external capital.

Dual–class ownership structure and audit fees

“…warrington.ufl.edu/ritter/ipo-data/. 15 Following prior literature (e.g., Gompers et al, 2010;Lim, 2016;Nguyen To identify firms that converted to a dual-class share structure through recapitalization, we search the CRSP files for issues with identical six-digit CUSIPs but different two-digit extensions to find firms with multiple classes of shares from 2002 through 2012.…”

“…Concentrated managerial ownership is associated with low credibility of accounting information (DeAngelo & DeAngelo, 1985;Francis et al, 2005), while the segregation between cash flow rights and voting rights is associated with severe conflicts of interest between the controlling insiders and the inferior class shareholders (Masulis et al, 2009). As a result, dual-class firms are often associated with poor information environment (e.g., Forst, Hettler, & Barniv, 2019;Lim, 2016), low informativeness of earnings (Francis et al, 2005), and are often perceived as having "bad governance" (Gompers et al, 2010). As a result, dual-class firms are often associated with poor information environment (e.g., Forst, Hettler, & Barniv, 2019;Lim, 2016), low informativeness of earnings (Francis et al, 2005), and are often perceived as having "bad governance" (Gompers et al, 2010).…”

“…From the supply-side perspective (the auditor's perspective), one argument is that audit firms will charge dual-class firms higher fees compared to single-class firms because of increased audit risk/business risk arising from a poor information environment (Lim, 2016), lower earnings informativeness (Francis et al, 2005), and greater agency conflicts (Masulis, Wang, & Xie, 2009) associated with dual-class firms. On the other hand, the managerial incentivealignment effect of a dual-class share structure leads to an improved financial reporting accuracy and better earnings quality (Nguyen & Xu, 2010;Tinaikar, 2014), better internal control (Warfield, Wild, & Wild, 1995), and decline in agency problems (Mitra, Hossain, & Deis, 2007)-all of which should lead to lower audit fees.…”

The Effects of Ownership Structure on Corporate Financing Decisions: Evidence from Stock Market Liberalization

“…). It has also been shown that DC firms have more acute informational asymmetries than SC firms (see Lim ; and Li et al. ).…”

“…Because cashflow and voting rights are separated under such a mechanism (in contrast to a one-share-one-vote system), controlling shareholders can expropriate wealth from the firm for their own benefit at very low personal cost (see DeAngelo and DeAngelo 1985;Grossman and Hart 1988; and more recently, Masulis et al 2009). It has also been shown that DC firms have more acute informational asymmetries than SC firms (see Lim 2010;. Such agency and informational costs can impose greater financing constraints on DC firms and results in higher costs of capital as investors often demand a larger premium to hold their stock (see Claessens et al 2002;Lins 2003;Durnev and Kim 2005).…”