Which Private Firms Follow GAAP and Why?
University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation
University of Chicago - Booth School of Business
September 11, 2015
Chicago Booth Research Paper No. 14-01
We provide new evidence on the production of audited GAAP financial statements by large U.S. privately held firms. We find that over 60% of these firms, which control $4 trillion of assets, do not produce audited GAAP financial statements. Using across industry, within industry, and within firm tests over time, our analyses reveal that several important characteristics — such as profitability, firm age, growth, ownership changes, and presence of intangibles — partially explain this variation. These findings are consistent with financial statements reducing information asymmetry and serving a stewardship role. However, economically substantial variation remains unexplained by traditional variables. Our findings suggest that incomplete contracting and alternative mechanisms, such as relationships and tangible assets, are useful alternatives to producing audited GAAP financial statements, even for large firms. Our study informs researchers, standard setters, and regulators on the actual use of audited GAAP financial statements in the broader U.S. economy and raises additional questions for future research.
Number of Pages in PDF File: 66
Keywords: audit, private firms, accounting choice, financial reporting, capital formation
JEL Classification: M41, M44, M49
Date posted: January 9, 2014 ; Last revised: September 12, 2015