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Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms

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  • Palas, Rimona
  • Solomon, Dov
  • Gafni, Dalit
  • Baum, Ido

Abstract

Dual-class capital structures create a gap (“wedge”) between voting and cash flow rights. Our analysis indicates that the larger the wedge, the higher the quality of financial reporting, reflecting a tradeoff between the dilution of voting rights and enhancement of the credibility of information provided to investors. It suggests that increasing management’s insulation from the market for corporate control is stronger than agency costs, reducing motivation to manipulate earnings. Moreover, better quality reporting allows for attracting second-class investors who agree to a larger wedge. Therefore, concerning financial reporting, a nuanced regulation restricting wedge size may not be more effective.

Suggested Citation

  • Palas, Rimona & Solomon, Dov & Gafni, Dalit & Baum, Ido, 2023. "Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323001472
    DOI: 10.1016/j.frl.2023.103774
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    Cited by:

    1. Gafni, Dalit & Palas, Rimona & Baum, Ido & Solomon, Dov, 2024. "ESG regulation and financial reporting quality: Friends or foes?," Finance Research Letters, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    Dual-class; Earnings quality; Financial reports; Disclosure; Corporate governance; Wedge;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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