Journal of Law, Finance, and Accounting > Vol 7 > Issue 1

The Quality of Earnings Information in Dual-Class Firms: Persistence and Predictability

Rimona Palas, Accounting Department, Business School, College of Law and Business, Israel, , Dov Solomon, Law School, College of Law and Business, Israel,
Suggested Citation
Rimona Palas and Dov Solomon (2022), "The Quality of Earnings Information in Dual-Class Firms: Persistence and Predictability", Journal of Law, Finance, and Accounting: Vol. 7: No. 1, pp 127-164.

Publication Date: 28 Apr 2022
© 2022 R. Palas and D. Solomon
Corporate governance,  Disclosure,  Financial reporting,  Corporate finance,  Law and economics
JEL Codes: G32, G34, G38, K22, M41, M48
Dual-classearnings qualityfinancial reportsearnings persistenceearnings predictioncash flow predictionrestatementsagency problemsdisclosurecorporate governance


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In this article:
Literature Review 
Basic Characteristic Differences between Single- and Dual-Class Firms 
Quality of Reporting 
External Indicators of Earnings Quality: Restatements 


A dual-class firm structure, in which one class of shares confers more votes per share than the other, creates a gap between voting rights and cash flow rights. In this paper, we examine the quality of the financial reports of dual- versus single-class firms publicly traded in the U.S. over the 2012--2017 period, as measured by persistence and predictive ability of earnings and cash flows. The results are based on comprehensive information from financial statements analyzed using across-sample and within-sample tests. An additional external indicator of financial restatement filings is also used to support the results. The findings demonstrate that the quality of financial reports is higher for dual-class firms than for single-class firms and increases over time. This suggests that the freedom from market pressures is stronger than agency costs, encouraging founders to provide investors with higher-quality information in exchange for superior voting rights. The results uncover important and counterintuitive evidence about the existence of a tradeoff between the dilution of voting rights and enhancement of the credibility of information provided to investors.