Disclosure Incentives and Data Availability for Private Firms: Implications for Comparisons of Public and Private Firm Financial Reporting Quality

• In Event: Accounting Attributes

Abstract

Prior literature provides mixed evidence on differences between the financial reporting quality (FRQ) of public and private firms. We explore the possibility that mixed results may be explained, at least in part, by the joint determination of firm FRQ and private firm decisions to disclose financial information. Using data surrounding a 2006 regulation change that dramatically strengthened enforcement of public disclosure requirements for German private firms, we compare the FRQ of three groups of firms: Private firms that voluntarily disclose financial statement information (“private voluntary” firms), private firms that disclose only due to effective enforcement of mandatory disclosure requirements (“private mandatory” firms), and public firms that are all subject to mandatory disclosure requirements. We find little or no evidence that “private voluntary” firms have different FRQ from public firms. However, we find consistent evidence that “private mandatory” firms have lower FRQ than both public firms and “private voluntary” firms. We also find evidence that the lower FRQ of “private mandatory” firms is largely due to reporting decisions that reduce earnings, consistent with tax minimization incentives. Overall, the results suggest that disclosure decisions and FRQ are jointly determined. Thus, understanding the effect of disclosure incentives on private firm data availability is critical to interpreting the results of studies that compare public firm and private firm FRQ.

Authors

• Darren Bernard, University of Washington-Seattle

• David Burgstahler, University of Washington-Seattle

• Devrimi Kaya, University of Erlangen-Nuremberg