Financial Reporting Quality of U.S. Private and Public Firms

Abstract

Using a new database that contains accounting data for a large sample of U.S. private firms, we provide an investigation of financial reporting quality (FRQ) of U.S. private versus public firms. We find that in general public firms have higher accrual quality and are more conservative. The results are consistent with public firms' reporting reflecting greater demand for financial information. However, these reporting qualities of public firms are mitigated or eliminated in settings where public firms are more likely to manage earnings or face reduced demand for their financial information. Our study contributes not only to the current debate on private versus public financial accounting, but also to the broader literature attempting to understand the determinants of FRQ.

Consequences of financial reporting quality on corporate performance: Evidence at the international level

“…As the other alternative measures of FRQ, I expect that companies which report more credible, error-free and unbiased information enjoy a better corporate performance, due to the fact that the market identifies these companies and positively assesses these ethical practices (Lu et al, 2012;Hope et al, 2012).…”

“…Meanwhile, Accruals quality is achieved when the information reported to investors and to the market is credible and free of error and bias, intentional or otherwise (Lu et al, 2012), thus expanding the scope and quality of reported information and ensuring that market participants are fully informed (Hope et al, 2012). Just as with the alternative FRQ measures, I expect that companies that report more credible information, free of error and bias, enjoy better corporate performance, making the market able to identify these companies and positively assess their ethical practices.…”

The timeliness of UK private company financial reporting: Regulatory and economic influences

“…We also expect the reporting lags of firms having voluntary audits to be less responsive to the regulatory change than their unaudited counterparts. Specifically, firms incurring the cost of appointing auditors to produce higher quality, credible information (Hope et al, 2013;Chi et al 2013) are expected to publish more quickly and hence should be less affected by a change in filing deadlines. Our hypotheses are therefore:…”

“…First, it provides novel evidence on the effects of regulatory and capital market influences in an environment where demand for accounting information is low compared with public companies (Ball and Shivakumar, 2005;Burgstahler et al, 2006;Hope et al, 2013). This evidence helps inform the debate about the relative influence of regulation versus the market over accounting (Ball, 2008).…”

“…Ball and Shivakumar, 2005;Burgstahler et al, 2006;Hope et al, 2013), it is unlikely that demand and incentives for financial reporting in the private corporate sector are universally low. Most public companies start life as privately owned and even if they remain private, they often need to attract significant levels of outside capital (e.g.…”