The informativeness of stock price at dual-class firms

Abstract

Abstract We examine whether disproportionate insider control, or the divergence between insider voting and cash flow rights at dual-class firms, influences the extent to which stock price reflects information about future firm performance. We find that current returns incorporate less information about future earnings and cash flows as disproportionate insider control increases. However, monitoring by influential institutional investors, strong board oversight, and high-quality disclosure significantly attenuate this effect, such that disproportionate insider control does not result in less informative stock prices. Collectively, our findings reveal that, although the dual-class structure is associated with less informative stock prices, on average, monitoring and disclosure can alleviate investor concerns about disproportionate insider control while allowing firms to take advantage of the benefits of a dual-class ownership structure.