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Multiple large shareholders and earnings informativeness

Multiple large shareholders and earnings informativeness Purpose – The purpose of this paper is to add to the understanding of the monitoring role of multiple large shareholders (MLS) by examining their impact on the informativeness of firms' earnings. Design/methodology/approach – The paper uses regression models that relate earnings to stock returns for a sample of 402 French publicly traded firms covered during 2003‐2007. Findings – The paper shows that earnings informativeness is significantly positively related to the owner's ultimate cash flow rights. Consistent with the alignment effect, stock ownership aligns management and shareholders interests which reduces managers' incentives to manipulate accounting information. It also finds that earnings informativeness is significantly negatively related to the excess control of the ultimate controlling shareholder. This result supports the entrenchment effect and suggests that controlling shareholders have greater incentives to obscure accounting figures when expropriation is likely. Finally, control contestability of the largest controlling shareholder mitigates information asymmetry problems thereby enhancing earnings informativeness. Research limitations/implications – The findings stress the importance of MLS in enhancing internal monitoring and mitigating agency costs. Because France is characterized by a weak legal system, highly concentrated ownership structures and excess control, the results provide valuable insights to mitigate extreme agency problems. Originality/value – The paper adds to the literature on corporate governance and the quality of accounting information by investigating strategic interactions between various blockholders and their impact on earnings informativeness. The study complements prior studies on the monitoring role of MLS by demonstrating that both their presence and control size translate into significantly greater earnings informativeness. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting and Finance Emerald Publishing

Multiple large shareholders and earnings informativeness

Sabri Boubaker; Hind Sami
Review of Accounting and Finance , Volume 10 (3): 21 – Aug 9, 2011
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References (94)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1475-7702
DOI
10.1108/14757701111155789
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to add to the understanding of the monitoring role of multiple large shareholders (MLS) by examining their impact on the informativeness of firms' earnings. Design/methodology/approach – The paper uses regression models that relate earnings to stock returns for a sample of 402 French publicly traded firms covered during 2003‐2007. Findings – The paper shows that earnings informativeness is significantly positively related to the owner's ultimate cash flow rights. Consistent with the alignment effect, stock ownership aligns management and shareholders interests which reduces managers' incentives to manipulate accounting information. It also finds that earnings informativeness is significantly negatively related to the excess control of the ultimate controlling shareholder. This result supports the entrenchment effect and suggests that controlling shareholders have greater incentives to obscure accounting figures when expropriation is likely. Finally, control contestability of the largest controlling shareholder mitigates information asymmetry problems thereby enhancing earnings informativeness. Research limitations/implications – The findings stress the importance of MLS in enhancing internal monitoring and mitigating agency costs. Because France is characterized by a weak legal system, highly concentrated ownership structures and excess control, the results provide valuable insights to mitigate extreme agency problems. Originality/value – The paper adds to the literature on corporate governance and the quality of accounting information by investigating strategic interactions between various blockholders and their impact on earnings informativeness. The study complements prior studies on the monitoring role of MLS by demonstrating that both their presence and control size translate into significantly greater earnings informativeness.

Journal

Review of Accounting and Finance – Emerald Publishing

Published: Aug 9, 2011

Keywords: Multiple large shareholders; Earnings informativeness; Excess control; Earnings; Stock returns; France

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