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

75 Pages Posted: 9 Jan 2014 Last revised: 2 Apr 2020

See all articles by Petro Lisowsky

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Michael Minnis

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 2020

Abstract

This study uses a comprehensive panel of tax returns to examine the financial reporting choices of medium-to-large private U.S. firms, a setting which controls over $9 trillion in capital, vastly out-numbers public U.S. firms across all industries, yet has no financial reporting mandates. We find that nearly two-thirds of these firms do not produce audited GAAP financial statements. Guided by an agency theory framework, we find that size, ownership dispersion, external debt, and trade credit are positively associated with the choice to produce audited GAAP financial statements, while asset tangibility, age, and internal debt are generally negatively related to this choice. Our findings reveal that (1) equity capital and trade credit exhibit significant explanatory power, suggesting that the primary focus in the literature on debt is too narrow; (2) firm youth, growth, and R&D are positively associated with audited GAAP reporting, reflecting important monitoring roles of financial reporting; and (3) many firms violate standard explanations for financial reporting choices and substantial unexplained heterogeneity in financial reporting remains. We conclude by identifying opportunities for future research.

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 2020). 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

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

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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