Insider Ownership and Financial Analysts' Information Environment: Evidence from Dual Class Firms

• In Event: Financial Accounting and Reporting II

Abstract

We analyze the association of insider ownership with the information environment of financial analysts and their output, specifically forecast accuracy and forecast dispersion. Insider ownership exerts two effects: a positive incentive effect, which comes from insiders' sharing in the cash flow rights of the corporation, and a negative entrenchment effect, which comes from insiders' ability to influence decisions of the corporation according to their personal preferences, i.e., insiders' voting rights. Prior research may not have found an association between insider ownership and forecast accuracy due to the offsetting forces of these effects. Using a comprehensive hand-collected sample of firms which maintain multiple classes of common stock, we are able to disentangle incentive and entrenchment effects which are confounded in single class firms. We find that the divergence of insider voting rights from cash flow rights, a common feature of dual class shares which convey differential voting rights across multiple classes of stock, is negatively associated with forecast accuracy and positively associated with forecast dispersion. Moreover, insider cash flow rights (insider voting rights) are positively (negatively) associated with forecast accuracy and negatively (positively) associated with forecast dispersion.

Authors

• Arno Forst, Kent State University

• Barry Hettler, Kent State University

• Ran Ron Barniv, Kent State University - Kent