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Accounting Choices and Capital Allocation: Evidence from Large Private U.S. Firms

72 Pages Posted: 9 Jan 2014 Last revised: 6 Jan 2017

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: December 1, 2016

Abstract

We provide new evidence on the relation between capital allocation and firms’ accounting choices. Using confidential data on the production of audited GAAP financial statements by large privately held U.S. firms, we focus on an economically important setting that controls approximately $10 trillion of capital, but is not subject to financial reporting mandates. Our main findings are threefold. First, we find the majority of firms (over 60%) do not produce audited GAAP financial statements, which publicly held firms are mandated to produce. Second, in contrast to prior literature focusing on debt contracting in the setting of private firms, the evidence reveals that capital allocated via equity and trade credit is more strongly related to the decision to produce audited GAAP financial statements compared to debt. Third, exploiting variation across firm, industry, and time, we find characteristics such as growth opportunities, firm youth, and the presence of intangibles are positively related to audited GAAP statements. Our findings have implications for the future use of accounting as the economy shifts to firms with softer assets and fewer firms turn to public equity markets for capital.

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

JEL Classification: M41, M44, M49

Suggested Citation

Lisowsky, Petro and Minnis, Michael, Accounting Choices and Capital Allocation: Evidence from Large Private U.S. Firms (December 1, 2016). 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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