Information is the lifeblood of financial markets. It is well recognized that the quality of corporate disclosure influences to a great extent the quality of investment decisions. Potential benefits of more disclosure include lower cost of capital (Diamond and Verrecchia, 1991), agency cost reduction (Leftwich et al., 1981) and improved share price (Gelb and Zarowin 2002; Lang and Lundholm 2000). To the extent that management has discretion over the quality of reported accounting information, a large literature on corporate governance has focused on the relation between managerial ownership and the quality of accounting information (Warfield et al., 1995). Departing from Berle and Means' (1932) seminal work on widely diffused corporate ownership, recent studies have focused on the conflicts of interest between controlling shareholders and minority shareholders (Ali et al., 2007; Villalonga and Amit, 2006). Specifically, when minority shareholders face possible expropriation by large controlling shareholders, the contest to the control is a key issue (See, e.g., Shleifer and Vishny, 1997; La Porta et al., 1999; Faccio and Lang, 2002; Maury and Pajuste, 2005).
This paper contributes to prior research by further examining the impact of the distribution of ownership and the contest to the control on earnings informativeness in a concentrated ownership setting. More specifically, this study seeks to add to the understanding of the monitoring role of multiple large shareholders (MLS) by examining their impact on the informativeness of accounting earnings. Our study is carried out on a sample of XXXX French publicly traded firms covered during the 2003-2007 period. France is characterized by weak legal systems and poor investors' protections laws which may in turn give rise to minority expropriation (La Porta et al. 1999). Indeed, French listed firms have highly concentrated ownership structures and control is enhanced via devices such as double voting shares and/or pyramiding. The control of French firms is often ensured through a relatively small proportion of cash flow rights compared to that of control rights (Faccio and Lang, 2002; Boubaker, 2007). These characteristics highlight an agency problem between the large controlling shareholders and minority shareholders. In this paper, we investigate strategic interactions between various blockholders in order to examine the effects of multiple large shareholders on firms' quality of earnings information.
First, focusing on agency problems between controlling and minority shareholders we explore whether having more than one large shareholder in the firm plays as a disciplining device which in turn may translate into greater informativeness of accounting earnings. Because we believe that control of ultimate owners is more relevant in assessing the outcome of agency conflicts we focus on the distribution of ultimate control rights. Warfield et al. (1995) focus on the incentive effects and find that earnings quality is generally increasing in the level of managerial ownership. Because stock ownership aligns management's interests with those of shareholders, this reduces or eliminates managers' incentives to manipulate accounting information. In turn, Fan and Wong (2002) examine a sample of East Asian firms and suggest that concentrated ownership is associated with low quality earnings since controlling shareholders may report self-interestedly (entrenchment effect) and may have incentives to disclose as little proprietary information as possible (information effect). We contribute to the unresolved debate by empirically examining the relation between the presence of large controlling shareholders and firm's earnings informativeness.
Second, we study the interaction between the two largest shareholders by examining the effects of the number, voting size and voting distribution among them. We thus contribute to the discussion of firm's agency costs stemming from the misalignment between control and ownership rights of ultimate shareholders (see e.g. Claessens et al. (2002); Lehmann and Weigand, 2000; Volpin, 2002; Maury and Pajuste, 2005). Fan and Wong (2002) show that due to the entrenchment effect, the credibility of the firm's accounting information is reduced which in turn lowers the stock price informativeness of the earnings. In addition, the loss of earnings credibility is increasing in the degree of divergence between the cash flow rights and voting rights (Francis et al., 2005). Thus, we extend previous works by providing evidence on the governance impact of MLS on financial reporting decisions. More precisely, considering the ownership and control divergence (or equivalently excess control), we analyze whether the presence of MLS may alleviate agency problems with minority shareholders thereby improving earnings informativeness.
Finally, we investigate the impact of shared control on the informativeness of the firm's earnings. Corporate governance literature agrees that the existence of large shareholders (beyond the largest controlling shareholder) can achieve a valuable internal monitoring function. Higher control contestability prevents opportunistic self-serving behavior thereby lessening minority expropriation (Gomes and Novaes, 2001), reduces the appropriation of private benefits of control (Bloch and Hege, 2003; Gutiérrez and Tribo, 2004), reduces rent extraction (Gomes and Novaes, 2001; Bennedson and Wolfenzon, 2000), enhances the value of firm's excess cash holdings (Laeven and Levine, 2008); Attig et al., 2009), is associated with a lower cost of equity capital for firms (Guedhami and Mishra, 2009). We extent this line of research by identifying a channel through which high control contestability of the largest controlling shareholder (or equivalently the presence of MLS) might enhance a firm's information quality and thus greater earnings informativeness.
Overall, our results consolidate the findings of who provide compelling evidence that control contestability may limit he negative effects associated with the presence of a single large shareholder, such as the presence of earnings manipulation and extraction of private benefits. More specifically, our study of how the presence of multiple large shareholders affects the informativeness of firms' accounting earnings generates several valuable insights. First, we find that earnings informativeness measured by the cumulative net-of-market 12-month stock returns (CAR), is significantly positively related to the ultimate cash flow rights. This evidence is consistent with the alignment effect whereby stock ownership aligns large shareholder's interests with those of minority shareholders, which in turn encourages transparency and reduces incentives to manipulate accounting information. We also find that earnings informativeness is significantly negatively related to the divergence between ultimate cash flow rights and control rights. This result is consistent with arguments advocating that excess control of the ultimate controlling shareholder is conducive to self-serving behavior (see e.g. Ball et al., 2003; Fan and Wong, 2002; Francis et al., 2005; Attig et al., 2006, among others). Our result lends support to the entrenchment effect suggesting that controlling shareholders have greater incentives to obscure financial figures using, among other earnings management, untimely disclosure, etc., to hide their diversion activities when the expropriation likelihood is substantial (i.e., excess control is high). Our findings for the full sample also show that the presence of multiple large shareholders and the contestability of control are related to significantly greater earnings informativeness. This result is consistent with the monitoring role of MLS (see Attig et al., 2008, Gomes and Novaes, 2005; Bennendsen and Wolfenzon, 2000; Guedhami and Mishra, 2009, among others). Indeed, we find that control contestability of the largest controlling shareholder mitigates information asymmetry problems thereby enhancing the informational environment of the firm.
The remainder of the paper is organized as follows. Section 2 develops our hypotheses on the relation between multiple large shareholders and firms' earnings informativeness taking into account the presence of the large controlling shareholder and the divergence between ownership and control. Section 3 describes data sample selection, variables construction and empirical methodology. Section 4 presents our empirical analyses. Section 5 concludes the paper.
Development of hypotheses
Ultimate cash flow rights
The effect of ownership structures on firm value has been extensively discussed. In publicly listed corporations, the separation between ownership and control may lead to conflicts of interest between financiers and managers who run the company (Fama and Jensen, 1983; Jensen and Meckling, 1976). These agency conflicts can be mitigated by monitoring. Investors with large ownership have strong incentives and enough control over the firm's assets to monitor management thereby pursuing firm's value maximization (for example, Berle and Means, 1932; Demsetz and Lehn, 1985; Schleifer and Vishny, 1986; Admati, Pfleiderer and Zechner, 1994). Large investors thus provide a solution to the free-rider problem (Bolton and Von Thadden, 1998; Kahn and Winton, 1998; Maug, 1998). In addition to high incentives to help overcome the conflicts of interest between shareholders and managers, large shareholders may coordinate their actions and put pressure on managers since voting power is not split among a highly segmented group of investors. Therefore, large blockholders not only have the incentive to decrease agency costs, but also the power to do so (Schleifer and Vishny, 1997). The presence of large controlling shareholders translates into strong incentives to monitor and discipline managers thereby replacing legal constraints on managerial opportunism (La Porta et al., 1999; Boubakri et al, 2005).
Yet, concentrated ownership can also imply potential drawbacks. First, large shareholders primarily represent their own interests. This means that they might use their control rights in order to maximize their own utility, which might come at the expense of other shareholders. Proponents of the private benefits hypothesis argue that large investors are more likely to enjoy certain benefits such as access to private information, which can be exploited for trading purposes (see Kim, 1993). As ownership becomes concentrated, large blockholders may lack incentives to encourage management to report high quality earnings. In other words, the private benefits hypothesis would imply a negative relation between concentrated ownership and earnings quality. Prior literature suggests that the impact of high levels of ownership on the informativeness of the firm's earnings depends on whether the incentive effects or the information effects prevail. Warfield et al (1995) focus on the incentive effects and find that earnings quality is generally increasing in the level of managerial ownership. Because stock ownership aligns management's interests with those of shareholders, this reduces or eliminates managers' incentives to manipulate accounting information.. In turn, Fan and Wong (2002) examine a sample of East Asian firms and suggest that concentrated ownership is associated with low quality earnings -or equivalently a low earnings informativeness- because of an entrenchment effect (the controlling shareholders may report self-interestedly) and an information effect (managers have incentives to disclose as little proprietary information as possible). Overall, since the entrenchment and information effects dominate incentives effects this may lead to lower credibility of accounting information.
The conflicting predictions between ownership concentration and earnings informativeness provides an opportunity to further explore this relation. We thus draw the following hypothesis.
Hypothesis 1: The informativeness of accounting earnings increases with the ultimate cash flow rights of the controlling shareholder.
Divergence between ownership and control
The ownership structure of French listed companies is characterized by the presence of large controlling shareholders who possess more control than their equity ownership indicates. Control concentration enhanced beyond ownership stakes may lead to a second agency conflict between controlling shareholders and minority investors (see e.g. La Porta et al., 2000). Extensive research documents that excess control built through pyramids structures, cross-holding among firms or by capturing the board of directors enables controlling shareholders to accrue private benefits thereby expropriating minority shareholders (La Porta et al., 1999; Claessens et al., 2000; Bertrand et al., 2002; Faccio and Lang, 2002). As such, the contest to the control of the dominant shareholders stems from the conflict between controlling and non-controlling shareholders (Ali et al., 2007; Maury and Pajuste, 2005; Volpin, 2002).
The probability of minority shareholder expropriation is particularly high if large investors hold voting rights in excess of cash flow rights (Faccio et al., 2001). In these cases, they have an incentive to pay out a larger proportion of company cash flows to themselves instead of evenly distributing funds among all shareholders. Francis et al. (2005) find that the earnings of dual class firms (i.e. firms characterized both by high levels of management ownership (DeAngelo and DeAngelo, 1985) and by a separation of cash flow rights from voting rights) are less informative than the earnings of single class firms, suggesting that the separation of control right and ownership is negatively related to informativeness of accounting earnings. Fan and Wong (2002) argue that East Asian firms with a discrepancy between voting rights and cash flow rights are perceived to provide controlling shareholders incentives to take self-interested actions causing the reported earnings to lose credibility to outside investors. In other words, the credibility-reducing effects of entrenchment are increasing in the degree of divergence between the cash flow rights and voting rights. Evidence on the relation between concentrated control and the divergence between ownership and control is provided by Claessens et al. (2002). For a large sample of firms from eight East Asian economies, they find a positive and significant relationship between firm value and the cash flow ownership of the largest shareholder and interpret this result as a positive incentive effect of large shareholdings.
In light of the above arguments, we draw the following hypothesis.
Hypothesis 2: Earnings informativeness decreases with the separation between ultimate cash flow rights and control rights (excess control).
Multiple controlling shareholders
Private benefits of control imply conflicts of interests that might be alleviated by relying on mechanisms capable of protecting the rights of minority shareholders. A large literature has emphasized the monitoring role played by outside shareholders (see e.g., Shleifer and Vishny, 1986; Kahn and Winton, 1998; Bloch and Hege, 2001; and Noe, 2002). Outside investors may lack incentives to monitor managers, since shareholders would bear all the monitoring costs but capture only a small portion of the monitoring gains (see Grossman and Hart, 1980). Bolton and Von Thadden (1998), and Burkart et al. (1997) argue, however, that outside investors have incentives to increase the liquidity costs without offering compensating advantages in monitoring, due to shareholders liquidity-control trade-off. Because the monitoring of investment decisions by outside investors fails to solve conflicts of interest, related themes of multiple large shareholders have also been visited as alternative mechanisms to protect minority shareholders. More specifically, an ownership structure with multiple controlling shareholders may play as a commitment device that allows large shareholders to reach an optimal monitoring intensity (Pagano and Roell, 1998). The presence of several large shareholders may then be associated with valuable monitoring, in particular when their share investments are evenly distributed. In other words, multiple blocks commit the firm to protect minority investors. Yet, a number of papers argue that multiple blockholders are unlikely to emerge. In Zwiebel's (1995) general equilibrium model, investors are sorting such that only one of them holds a block in any given firm, precisely because they want to eschew the sort of competition over benefits that we model. Winton (1993) emphasizes the free-rider problem in monitoring efforts among multiple large shareholders.
Contrariwise, some authors contend that the presence of multiple large shareholders may ensure the eschewal of expropriation. In a context where multiple large shareholders compete to gather minority votes as the latter is pivotal to seize control, Bennedsen and Wolfenzon (2000) show that it is optimal to have as much shareholders as possible in a controlling coalition. This coalition with the lowest possible cash flow stake will have the largest group of non-controlling shareholders from whom to expropriate which is bad outcome in terms of efficiency. Furthermore, the greater the cash flow possessed by this coalition, the more the coalition internalizes the costs of private benefits extraction and imposes limits on minority expropriation. Gomes and Novaes (2006) consider the trade-off that may exist between an inefficient monitoring of outside investors and the bargaining costs associated with the existence of multiple controlling shareholders. Their theoretical model allows solving this trade-off and shows that sharing control among large shareholders may increase efficiency in firms with investment opportunities that are hard to evaluate by outsiders. The presence of multiple large shareholders is seen as a device capable of limiting rent extraction, and securing the vote of minority shareholders when the different large shareholders' shares are fairly similar (Bloch and Hege, 2001). Hence, all large shareholders perform a monitoring role and compete for the votes of minority shareholders by committing to reduce their private benefits.
In line with these arguments, empirical studies were conducted to derive evidence on the impact of the presence of multiple large shareholders. Maury and Pajuste (2004) argue that the presence of several large shareholders should have a positive effect on minority investors and firm's efficiency. Contestability of the controlling coalition's power might increase firm value and limit the expropriation of minority shareholders. Moreover, the marginal cost of stealing increases with the number of coalition partners thereby discouraging the extraction of private benefits and diversion of profits. Indeed, high control contestability of the largest controlling shareholder might enhance a firm's information quality and thus greater earnings informativeness. This result consolidates the findings of Attig et al. (2009) who provide compelling evidence that the distribution of control rights among multiple large shareholders alleviate agency costs of firm's liquid assets. Their results indicate that an increase in the contestability of the largest controlling shareholder's control -as a result of the higher relative voting power of the second and third largest shareholders or the pivotal voting power of the minority interests-may enhance the value of firm's excess cash holdings, since it will be harder to convert liquid assets into private benefits. In line with Laeven and Levine (2008), this result indicates that a firm with uneven distribution of voting rights among the controlling shareholders is likely to have more serious agency problems that may lead to cash diversion. In turn, the existence of large shareholders (beyond the largest controlling shareholder) can achieve valuable internal monitoring. Attig et al. (2008) document that when other large shareholders intervene in the preparation of financial information concealing or manipulating earnings by the largest shareholder becomes costly and more difficult. A high control contestability of the largest controlling shareholder is then a device to protect minority shareholders plausibly because it alleviates the diversion of firm's resources for private benefits. The intuition behind this result is similar to that in Gutiérrez and Tribo (2004) who find that the presence of more than one controlling shareholder substantially decreases private benefit extraction because of the bargaining problem that occurs among large shareholders who are forced to share control.
Overall, control contestability may downgrade the negative effects of a single large shareholder, such as the presence of earnings manipulation and extraction of private benefits. Based on these arguments we propose the following hypothesis:
Hypothesis 3: Earnings informativeness increases when control is contestable. (Existence of multiple controlling shareholders (shared control)
Data and Methodology
Data Sources and sample selection procedure
The initial sample is restricted to all French firms available in the Worldscope database for the 2003-2007 period. Following previous studies, we remove regulated utilities (SIC code 4900-4999) and financial firms (SIC code 6000-6999) due to the specificities of their informational environment which is more likely to be affected by legal and regulatory motives rather than by agency concerns. We discard all unlisted firms, those listed since less than one year and those with incomplete financial and/or return data. We also exclude firms for which we were unable, due to missing ownership data, to trace control chains back to the ultimate controlling owners. Applying the above-mentioned criteria, we were left with a sample of 402 firms corresponding to 2384 firm-year observations. Financial data and stock price related data are retrieved from Worldscope database and Datastream, respectively. Data on ownership structures were excerpted from firms' annual reports which provide the list of all shareholders with more than five percent of the ownership or voting stake. Annual reports are available from the AMF's website (Autorité des Marchés Financiers).
Results and Analysis
Regression analysis
To test the effect of multiple large shareholders on earnings informativeness, we adopt the following regression model:
CARit = α0 + α1 (NIit) + α2 (NIit * UCFit) + α3 (NIit * Excess Controlit) + α4 (NIit * MLS Variablesit) + α5 (NIit * Firm Sizeit) + α6 (NIit * Qit) + α7 (NIit * Leverageit) + α8 (NIit *Industry diversificationit) + (Fixed Effects) + + É›it
where, for sample firm i, CARit is the cumulative net-of-market 12-month stock returns ending at the fiscal year-end t (winsorized at 1st and 99th percentile); NIit is the net earnings at the end of the fiscal year t scaled by the market value of equity at the beginning of the fiscal year t (winsorized at 1st and 99th percentile); UCF is the ultimate cash flow rights at the 10% threshold. It is measured as the sum of products of direct cash flow rights along the different ownership chain; Excess Control is a proxy for the separation between ultimate cash flow and control rights. It is computed as the difference between the ultimate control stake (UCO) and the ultimate cash flow stake (UCF), all divided by the ultimate control stake ((UCO-UCF)/UCO). UCO is the ultimate control rights at the 10% threshold. It is the sum of weakest links along the different control chains. MLS Variables are various proxies for the presence and relative voting power of large controlling shareholders beyond the dominant owner. They are included one at once depending on the the specification. Among the MLS Variables we include the following measures. First, MLDS is the multiple large shareholder dummy variable. It equals one if there are at least two large shareholders who hold each more than 10% of the control rights, and zero otherwise. Second, VOTE21 is the ratio of control rights of the second largest shareholder to control rights of the largest shareholder, VOTE2/VOTE1. Third, VOTE231 is the ratio of voting rights of the second and third largest shareholders to voting rights of the largest shareholder, (VOTE2+VOTE3)/VOTE1. Finally, HERFDVOTE is the Herfindhal index of the differences in the voting rights of two successive large shareholders, (VOTE1-VOTE2)2+(VOTE2-VOTE3)2.
We introduce a set of variables as surrogates of firm characteristics to control for observed variations in the relation between earnings and returns that are likely due to causes other than those related to firm ownership structure. We rely on previous research in considering the following variables that may affect firms' earnings informativeness. Because a positive association between firm size and public disclosure may exist (Bamber, 1987; Freeman, 1987), we include the natural logarithm of the market value of equity in millions of euros at the beginning of the fiscal year t (Firm size) to control for the effects of firm size on the earnings-return relation.
We also use, Q, the ratio of the market value of equity divided by the book value of total assets at the beginning of the fiscal year t (winsorized at 1st and 99th percentile) to control for the impact of growth prospects. Collins and Kothari (1989) find a positive relationship between growth opportunity and earnings transparency. Smith and Watts (1992) also find that there is positive relationship between diluted securities issuance and companies' growth. On the one hand, high company growth opportunity translates into larger expected earnings growth. As investors have a more significant reaction towards current earnings, informativeness will be reflected better on the company's stock prices. On the other hand, the market-to-book ratio is tied to firm risk. The risk associated with high growth firm and/or fast growing firms growth prospects may translate into less informative earnings. Therefore, the net effect of growth prospects on the earnings-return relation is ambiguous.
We also include leverage as a control for firms' default risk. Leverage negatively impacts bond assessment (Dhaliwal and Reynolds, 1994) and earnings informativeness (Billing, 1999). Therefore, we expect that highly levered firms have less informative earnings. Leverage measured as the ratio of the book value of total liabilities divided by the book value of total assets at the beginning of the fiscal year t.
Finally, we include Industry diversification as the number of distinct business segments at the two-digit SIC code level in which the sampled firm operates. Prior studies showed that a company's industry diversification has a detrimental effect on financial analysts' ability to forecast earnings (Denis et al., 1997). Hence, a company's unrelated and related industry diversification may have negative impact on earnings informativeness.
Table 2 analyzes the identity of the controlling shareholders of French listed firms depending on whether the control is maintained by one or multiple controlling shareholders. The results show that concentrated ownership is a ubiquitous feature of these firms. Only 6% of the French listed firms do not exhibit a controlling shareholder at a control threshold of 10%. Following previous relevant literature, we categorize ultimate owners into five classes namely (1) family; (2) widely held firm; (3) widely held financial institution; (4) State; and (5) miscellaneous (i.e., a charity, a cooperative, employees, etc.). As a result, we find that family firms dominate the corporate landscape in France (83.31%). The State, widely held corporations and widely held financial institutions control only 4.51%, 3.53% and 4.77% of the French listed firms, respectively. Multiple large shareholders are fairly common (44.89% of controlled listed firms). They are less present in family firms (43.06%) and in state-owned firms (43.56%).
Table 4 provides summary statistics of all variables used in the empirical analysis. The CAR and NI present both large dispersion across sampled firms with a median value of - 5.41% and 5.49%, respectively. Summary statistics of ownership variables are in accordance with those provided by Faccio and Lang (2002) and Boubaker (2007). They show that the control of French firms is often ensured through a relatively small proportion of cash flow rights compared to that of control rights. In fact, ultimate controlling owners hold, on average, 41.00% of the ultimate cash flow rights and also control significantly more control rights than those determined by their corresponding ownership stakes leading to an average excess control of 21.24%. This separation between ultimate cash flow rights and control rights is prevalent in roughly 81% of the sampled firms. The voting power of the largest controlling shareholder is, on average, four times higher than that of the second largest shareholders (VOTE21 = 25%). The Herfindahl index measures the dispersion of voting rights among main large shareholders. It shows, as other MLS proxies, systematic differences across sampled firms and ranges from a minimum of 0 (equal voting power between largest shareholders) to a maximum of 98% (only one dominant shareholder). As for the degree of Industry diversification, the mean (median) of diversification is 2.82 (2), thereby referring to double-industry firms on average in the sample. In addition, the dispersion in the sample varies widely from specialized firms (singe-industry firms) to highly diversified firms.
As a starting point, we first estimate a basic simple linear regression model that relates earnings to stock returns in France:
CARit = α0 + α1 (NIit) + (Industry dummies) +É›it
where, the CARit is the cumulative net-of-market 12-month stock returns ending at the fiscal year-end t. The annual returns are continuously compounded from weekly stock returns starting from 52 weeks (12 months) before the latest date that the firm discloses its annual report.; NIit is the net earnings at the end of the fiscal year t scaled by the market value of equity at the beginning of the fiscal year t. Both variables are winsorized at 1st and 99th percentile. Industry dummies are constructed following Campbell's (1996) classification. ɛit the error term at year t. Similar to prior research, the ordinary least squares regression results show that the estimated coefficients of earnings are positive and statistically significant at a 1% threshold level irrespective of whether the equation is estimated on a year by year basis or on the pooled sample of all years from 2003 to 2007. This implies that earnings have substantial informational content for French listed firms.
The largest controlling shareholder and earnings informativeness
Following in the footsteps of Claessens et al. (2002), we include ultimate cash flow rights (UCF) in all regressions to control for the incentive alignment effect of the largest shareholder and ultimate control rights in excess of cash flow rights (Excess Control) as to control for the extent of his/her entrenchment. Consistent with Hypotheses 1 and 2, the coefficients on UCF (α2) and on Excess Control (α3) are expected to be significantly different from zero. A positive estimate on α2 will be evidence that a higher interest stake of the largest controlling shareholder is associated with more informative earnings which is consistent with the incentive effect. A negative estimate on α3 will provide evidence that the earnings of firms exhibiting larger separation between ultimate cash flow rights and control rights are less informative that others. The empirical results are portrayed in Table 6. They are from the pooled ordinary least squares regressions using the CAR as the dependent variable where the t-statistics are based standard errors with White (1980) correction for heteroscedasticity and adjusted for clustering for observations at the firm level. In conformity with the first hypothesis, the coefficient UCF is positive and statistically significant at 1% confidence level. This suggests that higher cash flow stakes of the large controlling shareholder are associated with more convergence between his/her interests with those of minority shareholders. In other words, large shareholders are more inclined to opt for higher financial reporting quality and for more disclosure of material information in a timely and convenient manner which leads to greater informativeness of accounting earnings.
Consistent with our second hypothesis and in accordance with the entrenchment effect argument, the coefficient of Excess control is negative and statistically significant at the 1% confidence level. Higher separation between cash flow rights and control rights makes the market expect more entrenchment of the controlling shareholder who may prefer to establish delayed or misleading disclosure practices that hide his/her potential expropriation activities. This market perception reduces reliance on accounting earnings reports which weakens earnings informativeness.
Overall, results provide strong evidence that earnings are more informative in firms where ultimate owners hold large cash flow rights and less informative when cash flow right are separated from control rights which supports our two first hypotheses. All specifications are significant at least at 0.001 level. The adjusted R2 values are about 0.07 and are comparable with those of relevant studies.
The effects of growth opportunities on the relation between accounting earnings and market returns is controlled through the use of Q . The coefficient on this variable is positive indicating that higher growth potentials strengthen the earnings-return relation. Leverage is negatively associated with earnings informativeness. High leverage often implies higher likelihood of default risk suggesting loosely relationship between return and earnings. The coefficient on Industry diversification is negative suggesting that earnings are more informative in focused than in diversified firms. One possible explanation is that earnings in focused firms are generated through a relatively less complex process. Firm size, proxied by the natural logarithm of the market value of equity, does not seem to affect the extent of earnings informativeness in France.
Multiple controlling shareholders and earnings informativeness
The main focus of this study is to investigate the impact of multiple large shareholders on the informativeness of the firms' earnings. To the extent that multiple controlling shareholders play an efficient-monitoring role and limit the agency costs associated with the presence of a dominant owner, we expect that earnings informativeness increases with the presence of more than one controlling shareholder (MLSD=1), when the power of the remaining large shareholders (Vote21 and Vote231) is substantial and when the concentration of differences in voting rights of two successive large shareholders (Herfdvote) is low. Lower values of Herfdvote correspond to situations where controlling shareholders have comparable voting stakes. We expect that more contestable control (i.e., lower Herfdvote) reduces the likelihood of private benefits extraction, increases the commitment to a more consistent disclosure policy and thereby enhances the informative content of firm earnings.
Table 6 displays regression results of multivariate regression with MLS-related proxies as independent variables and the CAR as the dependent variable. The coefficient on net income (N) in specification 1 (Table 6) is 0.1590 and significant at p < 0.05. The coefficient on our key test variable (N*MLSD) is 0.1149 with a p-value less than 0.01. This suggests that, on average, the earning response coefficient of firms with multiple large shareholders is 72.26% (0.1149/0.1590 = 0.7226) higher than that for firms controlled by a unique large shareholder. This result is economically significant using the 10% rule of thumb for materiality. MLS seem to play an important governance role in limiting rent-seeking behavior. Their presence enhances the quality of accounting earnings and increases confidence on reported figures which in turns strengthens the relationship between stock prices and accounting of earnings.
In the second specification, we use a continuous measure of the relative power of the second largest controlling shareholder versus the largest shareholder (Vote21). Consistent with the precedent result, the coefficient on this variable (N*VOTE21) is 0.1989 with a p-value less that 0.01, which suggests that earnings are more informative in firms where control is contestable. If the relative power increases by 1%, the earnings response coefficient will be 1.2975% (0.1989%/0.1533 = 1.2975%) higher every thing else being equal. Results remain qualitatively similar but significant at only 5% when we consider the relative power of the second and third largest shareholders to voting rights of the largest shareholder (Vote 231).
The results from the last specification in Table 6 confirm our previous conclusions. The coefficient on (N*Herfdvote) is negative and statistically significant at the 1% level. This shows that the presence of controlling shareholders with comparable distribution of voting power curbs the extraction of private gains, hence reducing the accounting earnings management needed to veil potential opportunistic behavior which leads to better earnings information.
All in all, the results in specifications 1 through 4 show that the presence and voting size of large controlling blockholders beyond the dominant owner are associated with higher-quality earnings. These findings lend support to the argument that multiple large shareholders play a valuable governance role in mitigating the agency costs that arise between the controlling shareholder and minority shareholders.
Check of robustness
Aa
Conclusion
Prior research provides evidence that there is a correlation between ownership structure and corporate disclosure policy (see e.g. Fan and Wong, 2002; Attig et al., 2006). Using data on ultimate owners of French listed firms, this paper extends this line of research to shed light on the effects of the presence of multiple controlling shareholders on firms' earnings informativeness. It complements prior findings with respect to the effect of control concentration and excess control on the quality of firms' accounting information. It also sheds some light on the governance role of large blockholders, beyond the controlling shareholder.
This study documents several interesting findings. First, we show that earnings informativeness is significantly positively related to the ultimate cash flow rights of the owner. This evidence is consistence with the alignment effect whereby stock ownership aligns management's interests with those of shareholders, which in turn reduces managers' incentives to manipulate accounting information. Second, we find that earnings informativeness is significantly negatively related to the excess control of the ultimate controlling shareholder. This result supports to the entrenchment effect argument and suggests that controlling shareholders have greater incentives to manipulate earnings to hide their diversion activities when the potential expropriation of minority investors is substantial. Finally, we document the monitoring role of MLS and show that the presence, number and control size of multiple large shareholders translate into significantly greater earnings informativeness. Control contestability of the largest controlling shareholder mitigates information asymmetry problems thereby enhancing firms' earnings information.
