Private Firms in Europe: Earnings Attributes and Economic Consequences*

• In Event: Accounting in SMEs

Abstract

We investigate the association between attributes of accounting earnings and private firms’ access to two main sources of financing: bank debt and trade credit capital. The earnings attributes we consider are: accrual quality, the incremental persistence of earnings over and above the persistence of cash flow from operations, and the incremental predictability of earnings over and above the predictability of cash flow from operations. Using a sample of private firms from the European Union’s five largest economies (United Kingdom, Germany, France, Italy, and Spain) during the period 1997- 2010, we find that financial reporting quality is, in general, associated with a lower cost of debt and better access to trade credit financing. Accrual quality is negatively related with the cost of debt, whereas persistence and predictability yield mixed results. The analysis of trade credit offers robust results across earnings attributes: all three earnings attributes show that financial reporting quality is associated with higher levels of trade credit. The association between persistence or predictability and the cost of debt is stronger in the U.K. than in Continental Europe. The trade credit analysis yields opposite results. In particular, financial reporting quality appears to be less important in the U.K. than in Continental Europe. Overall, the findings suggest that the financial reporting choices of private firms do have economic implications, despite the presence of private communication channels that serve as alternative information asymmetry- mitigating mechanisms.

Authors

• Anastasios Elemes, RSM, Erasmus University

• Erik Peek, Erasmus Universiteit Rotterdam