Overview
This study examines the link between corporate control and financial reporting, focusing on the challenge of valuing voting rights. Using a novel option-based methodology, we quantify the voting premium and analyse its response to earnings announcements, documenting a significant negative relation with earnings surprises. The effect is stronger around shareholder meetings, with activist involvement, and in firms with weak performance, and weaker when insider ownership is higher. Our findings indicate that earnings announcements affect stock prices through both cash flow and voting rights.
Project researchers
Umit G. Gurun
University of Texas at Dallas
Oğuzhan Karakaş
Cambridge Judge Business School – Finance Subject Group; European Corporate Governance Institute (ECGI)
Research summary
The research examines how accounting earnings announcements affect the market value of shareholder voting rights, offering new insight into the link between financial reporting and corporate control. While earnings are typically studied for their information about future cash flows, this paper shows that they also shape how investors value their ability to influence management through voting.
Using a novel option-based methodology, the authors measure the voting premium—the market value of voting rights—on a daily basis for 6,854 U.S. firms between 1996 and 2022. This method allows the value of control to be observed even in widely held firms without block trades or dual-class shares. The study then examines how this voting premium responds to earnings surprises.
The central finding is a strong negative relationship between earnings surprises and changes in the voting premium. When firms report worse-than-expected earnings, the value investors place on voting rights increases. This suggests that poor earnings heighten disagreements among investors about how the firm should be managed and increase the perceived likelihood of control contests, making voting power more valuable.
This effect is stronger when shareholder meetings are approaching, when activist investors hold stakes in the firm, and when insider ownership is low. The results are also more pronounced when poor performance reflects managerial inefficiency rather than industry conditions, indicating that markets can distinguish between bad luck and poor management. Extensive tests show the findings are not driven by liquidity issues, short-selling constraints, or informed trading.
Overall, the study demonstrates that earnings announcements affect stock prices not only through cash flow expectations, but also by altering the value of corporate control, highlighting an important and previously overlooked governance role of financial reporting.
Related paper
Access and download the full paper here: Gurun UG and Karakaş O, Earnings and the Value of Voting Rights (European Corporate Governance Institute – Finance Working Paper No 1043/2025, revised 3 April 2025, forthcoming in Financial Management) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2793545
