The Silent Majority: Private U.S. Firms and Financial Reporting Choices

73 Pages Posted: 9 Jan 2014 Last revised: 12 Apr 2018

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation

Michael Minnis

University of Chicago - Booth School of Business

Date Written: April 12, 2018

Abstract

We analyze a comprehensive panel of over 200,000 business tax returns to reveal new insights into the economic significance and financial reporting choices of medium-to-large private U.S. firms. We find that these firms control over $9 trillion in capital and vastly outnumber public firms across all industries, even among firms with revenues exceeding $100 million. We also find that private firms’ financial reporting choices run counter to expectations inferred from prior literature. Nearly two-thirds do not produce audited GAAP financial statements. Moreover, while firms with external capital are more likely to produce audited GAAP statements, we find that thousands of firms with external debt and dispersed ownership do not. Equity and trade credit are potentially more important factors than debt in affecting private firms’ production of audited GAAP reports. Finally, young, high growth firms lacking tangible assets are significantly more likely to produce audited GAAP reports relative to established firms with physical assets, suggesting that audited financial reports play an important information role in capital allocation when business activity is less verifiable. Collectively, we contribute new insights about private U.S. firms and the market for financial re-porting.

Keywords: audit, private firms, accounting choice, financial reporting, capital formation

JEL Classification: M41, M44, M49

Suggested Citation

Lisowsky, Petro and Minnis, Michael, The Silent Majority: Private U.S. Firms and Financial Reporting Choices (April 12, 2018). Chicago Booth Research Paper No. 14-01. Available at SSRN: https://ssrn.com/abstract=2373498 or http://dx.doi.org/10.2139/ssrn.2373498

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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