Stakeholder Demand for Accounting Quality and Economic Usefulness of Accounting in U.S. Private Firms
38 Pages Posted: 25 Jun 2014 Last revised: 22 Sep 2016
Date Written: September 21, 2016
For some privately-held firms, the costs of providing high-quality accrual-based financial statements may outweigh the benefits of accommodating the demands of their stakeholders who may rely more on cash flows or have direct access to management. For other private firms, greater stakeholder demand for their financial information necessitates them providing higher-quality accounting. Using a large sample of U.S. private firms, we first confirm that accrual quality in private firms is associated with the ability of accruals to predict future cash flows. Next, we predict and find that accrual quality increases with the demand for monitoring by equity investors, lenders, and suppliers. Overall, our evidence suggests that accrual quality of private U.S. firms is useful, has economic consequences, and varies predictably with certain firm characteristics.
Keywords: private firms, accrual quality, stakeholders, demand factors, cash-flow prediction
JEL Classification: M41, G30, G31, G32, G34, M10
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