Research On Effects Dual Class Structure Has On The Quality Of Earnings Information

Following the Internet companies went public in the U.S. one after another, such as Baidu, Jingdong, whether Chinese public companies should be allowed to adopt Dual Share Class became a discussion topic in China. As is well known that although it deviated from the principle of One Share-One Vote of Chinese companies, Dual Share Class has been widely recognized in the capital market by many western countries that they allowed their national companies and enterprises to operate with the special share structure. However, the Dual Share Class has both advantages and disadvantages. On one hand, it can help companies to strike a balance between managers’pursuit of power control under the direct ownership structure and their wish to secure a greater financial scale through getting listed. On the other hand, Dual Share Class can realize the separation of power control and the right of controlling cash flow, which will lead to serious agent problems between shareholders and outside shareholders with real power control. This paper aims to have a deep and detailed analysis of the relationship between Dual Share Class and earnings management by the empirical study and give suggestions for those new Chinese companies with Dual Share Class in the future as well.This paper analyze the effects of the power control and the controlling power of cash flow under Dual Share Class on the behavior of earnings management, through the case studies of several companies with Dual Share Class went public overseas successfully and their financial data between the year of 2012 to 2015 will be used as research sample, by both qualitative and quantitative analysis. The first, this paper summarizes study results of both domestic and overseas researchers through literature review. We can know the academic study trend of Dual Share Class and earnings management and according to the summarize of those imperfections in the studies before, we illustrate the study method and provide appropriate theoretical framework. The second, this paper gives conclusions of the relationship between Dual Share Class and earnings management by descriptive statistical analysis and multiple linear regression analysis. Therefore, we can draw a conclusion that a) Companies under Dual Share Class, there are positive relationship between the voting right of managers and the level of earnings management, which means that with the increase of voting right of managers, the level of earnings management of the company will increase; b) There are negative relationship between the voting right of institutional investors and the level of earnings management; c) If there are more differences of voting right of managers and the controlling power of cash flow, the level of earnings management of public companies will be enhanced. Overall, this paper indicates that under Dual Share Class, earnings management became more significant.