"We provide a large-scale investigation of financial reporting quality (FRQ) among U.S. private firms. Private firms are vital to the economy but have received limited attention from researchers due to a lack of available data. Using a new database that contains accounting data for a large sample of U.S. private firms, we provide interesting new evidence on their FRQ. Relative to publicly traded companies, we find that private firms have lower FRQ as proxied for by several commonly used FRQ measures and are less conservative. Further, we provide the first exploration of cross-sectional variations in the FRQ of private firms. Specifically, we show that private firms with greater external financing needs and a greater presence of long-term debt have higher FRQ and greater conservatism. Private firms with greater owner-manager separation (i.e., C corporations) tend to exhibit lower FRQ but more conservatism."
Interesting and will make it to class, but I am not sure how surprising. Firstly the need for quality information may be lower in private firms so a lower level of financial reporting quality may be optimal (managers know what is going on already even given the c-corp control). And secondly, bonuses are more common (make up a larger percentage of pay since no stock options) in private firms and as these are often tied to income, one would expect less conservatism.
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