Title: Dual class ownership structure and real earnings management
Authors: Pavinee Manowan; Ling Lin
Chulalongkorn University, 254 Phayathai Road, Pathumwan, Bangkok 10330, Thailand
University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA
Abstract: Dual class firms feature ownership structures where managers possess voting control far in excess of their cash flow rights. One view notes that as managerial control increases, their ability to expropriate minority shareholders increases. Therefore, they may engage in more earnings management in pursuit of their own interest. Another view notes that the concentrated voting rights can reduce the likelihood of managers being displaced in a hostile takeover. Therefore, managers can focus on long-term firm value and have less incentive to manipulate real short-term earnings. Taken together, the impact of dual class ownership structure on earnings management presents an empirical question. The empirical results in this study show that dual class firms on average have lower cash flow from operations when compared to single class firms. However, there is no significant difference in discretionary expenses or production costs between dual class firms and single class firms.
Keywords: dual class ownership structure; real earnings management; voting rights; cash flow; discretionary expenses; production costs.
Int. J. of Accounting and Finance, 2013 Vol.4, No.1, pp.86 - 97
Submission date: 27 Feb 2012
Date of acceptance: 19 Oct 2012
Available online: 05 Apr 2013