The Silent Majority: Private U.S. Firms and Financial Reporting Choices
73 Pages Posted: 9 Jan 2014 Last revised: 12 Apr 2018
Date Written: April 12, 2018
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: Suggested Citation