Dual Class Structures Effect on Earnings Management

University essay from Handelshögskolan i Stockholm/Institutionen för redovisning och finansiering

Abstract: This thesis contributes to the heated debate on the costs and benefits of the dual class structure by investigating its effect on earnings management. With a refined research design applied to a Swedish setting, where dual class firms are more prevalent than in most other developed countries in the world, the report provides a basis for future research and for intriguing international comparisons. This study performs tests on the direction as well as the causality of the relationship between dual class structures and earnings management. The major finding is that there is a statistically significant negative association. By addressing endogeneity concerns with instrumental variables, a statistically significant causality of dual class structures leading to less earnings management is also found. Given that discretionary accruals is a good proxy for earnings management, the results indicate that on average, managers of dual class firms engage in less earnings management activities than managers of single class firms. Additionally, a statistically significant U-shaped relationship between the disproportionality of distributed voting rights across share classes and earnings management is found in dual class firms. The effects of dual class structures appear to not only be dependent on adopting the structure, but also depend on the specific voting ratio and the number of shares in each share class.

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