Does Accounting Matter for Capital Formation? Determinants and Consequences of Private Equity Fund Financial Reporting Choices

Abstract

Private equity (PE) funds are increasingly important to the economy and to investors, yet we know little about many aspects of these inherently opaque and lightly regulated funds. We study the fundamental financial reporting choices – audit, auditor, and accounting standard – of PE funds and evaluate whether these choices affect funds’ capital formation. We find that fund size and ownership characteristics are associated with decisions to obtain an audit, use a Big 4 auditor, and prepare GAAP financial statements. These results suggest that PE funds’ agency costs and investors’ information needs influence funds’ financial reporting choices. However, we find little evidence that financial reporting facilitates PE fundraising. Results are consistent with either financial reporting failing to aid capital formation in PE markets, in contrast to other markets, or with PE funds voluntarily choosing financial reporting only when needed (e.g., only used by funds that would have worse fundraising without reporting). In either case, results are inconsistent with recent SEC efforts to regulate PE fund financial reporting and suggest that mandates would impose requirements on funds that are unlikely to benefit from the mandates.

Keywords: Audit choice, GAAP choice, Capital formation, Private equity, Venture capital, SEC regulations

JEL Classification: M42