Public Peers, Accounting Comparability, and Value Relevance of Private Firms’ Financial Reporting

The information spillover role of corporate spin‐offs in financing activities: Evidence from equity sales by private firms through Regulation D

“…In summary, prior evidence on public to private information spillover suggests that mandatory disclosures by public firms have various forms of externalities on private firms, such as secondary market valuation, equity sales to public investors and investment decisions. We extend this line of research by examining the usefulness of public peer information in the setting of equity raisings by privately held firms through Regulation D. Moreover, unlike prior studies measuring the amount of peer information as the number of public firms in the same industry segment (Badertscher et al, 2013;Bourveau et al, 2022;Shroff et al, 2017), we identify an increase in the quantity of public peer information pertaining to valuation multiples (Gompers et al, 2016) caused by corporate spin-offs. As these actions are largely motivated by a public firm's internal control and efficiency issues (e.g., Ahn & Denis, 2004), we expect the parent firm's decision to separate its business unit to be unrelated to its private peers.…”

“…Specifically, they find that the importance of publicly available peer information dissipates as the amount of firm-specific information increases over time. 11 Using data on the EU's private acquisitions, Bourveau et al (2022) find that the number of public peers increases the value relevance of private firms' accounting numbers.…”

“…On one hand, in the absence of publicly available firm-specific information about a private firm, the incremental information provided by a newly spun-off firm operating in the same product market can be invaluable to potential private capital suppliers when assessing industry prospects. According to the field interview results reported by Gompers et al (2016) and Bourveau et al (2022), the investors of private firms may find an additional valuation multiple on a peer firm useful as these investors can readily apply the multiple to their own private investment options. As the precision of information increases with the quantity of that information (Kim & Verrecchia, 1991), the information gleaned from public industry peers likely enhances the accuracy of profitability estimates formulated by the private capital suppliers and, thus, reduces the valuation uncertainty of private firms' equity sales.…”

“…On the other hand, some (e.g., Stein, 2017) argue that the policies may disincentivize the small businesses from going public and, consequently, decrease the number of public firms. 6 As surveyed by Bourveau et al (2022), if valuation multiples of public firms (e.g., mapping of earnings to publicly traded share prices) mitigate valuation uncertainty of private peers, a reduction in the amount of public information as a whole can, in turn, hinder the private firms from raising required capital. Although we do not directly speak to the broader debate regarding the information externality of the regulatory regime change, we inform the discussion by documenting that private firms "free-ride" on public firms' mandatory disclosures through the information spillover channel (Stein, 2017).…”

How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

“…By doing so, we also contribute to the disclosure spillover literature, which has primarily focused on the informational transfers from public firm disclosures to outside stakeholders such as private firms (Badertscher et al (2013); Bourveau, Chen, Elfers, and Pierk (2020); Barrios et al (2021)), but less so on the reverse effectthat private firm disclosures can impact public firm outcomes.…”