Financial Reporting Quality of Public and Private Firms
A new Working Paper from Harvard Business School finds little difference in the quality of financial reporting between public and private-equity backed companies.
“Public ownership of the firm’s equity exposes management to investors’ demand for reporting quality. This demand, which is expressed by investors in the form of the regulatory and legal environment in which the public equity firm operates, should lead to higher reporting quality,” the paper says. “At the same time, the findings support the notion that management of firms whose equity is publicly traded has stronger incentives to manage earnings, thus reducing the reliability and usefulness of financial reports.”We further find that public equity firms report more conservatively than privately held firms although…this result does not necessarily imply a higher quality of reporting for the former group of firms.”
Overall, while public equity and private equity firms differ along various quality and financial attributes dimensions, neither type of firm “dominates” the other as having the highest quality of financial reports.
“Unless weights are assigned to different dimensions of earnings quality and attributes, one cannot conclude that the public listing of a firm’s equity necessarily improves the quality of its financial reporting.”
Does Public Ownership of Equity Improve Earnings Quality?
Dan Givoly
Carla Hayn
Sharon P. Katz
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