Organizational Structure and Earnings Quality of Private and Public Firms

68 Pages Posted: 16 Nov 2016 Last revised: 29 Jul 2019

See all articles by Massimiliano Bonacchi

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management; Stern School of Business, New York University

Antonio Marra

Bocconi University - Department of Accounting

Paul Zarowin

New York University (NYU) - Department of Accounting

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Date Written: February 19, 2017

Abstract

We examine how heterogeneity in organizational structure affects private firm earnings quality in the European Union. Organizational structure refers to whether the firm is organized as a single legal entity (standalone) or as a business group: the former are firms not controlling or controlled by another firm, while the latter are firms that own a majority stake in one or more subsidiaries. Private firms can be either groups or standalone firms, while public firms are de facto groups. Even though private firms are not affected by market forces, we show that private business groups face greater stakeholder pressure for earnings quality than do standalone firms, while standalone firms have stronger tax minimization incentives. Due to these differences in nonmarket forces, private business groups have higher earnings quality than standalone firms. This heterogeneity among private firms is an important unexplored factor in the study of private firms, affecting the comparison between public and private firm earnings quality. This comparison matters, because it attests to the net effects of market forces (i.e., demand versus opportunism) on public firms. We find that overall, public firms have higher earnings quality than private firms, but this relation reverses when we control for nonmarket forces by examining business groups only. Our findings suggest that, in the European Union, the negative effects of opportunism outweigh the positive effects of market demand in determining public firms’ earnings quality, and reconcile past conflicting evidence on public versus private earnings quality.

Keywords: private firms; business groups; standalone; stakeholder incentives, earnings quality; non-market forces

JEL Classification: D22; G15; G32 K22; M41

Suggested Citation

Bonacchi, Massimiliano and Marra, Antonio and Zarowin, Paul, Organizational Structure and Earnings Quality of Private and Public Firms (February 19, 2017). Available at SSRN: https://ssrn.com/abstract=2869293 or http://dx.doi.org/10.2139/ssrn.2869293

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management ( email )

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HOME PAGE: http://www.unibz.it/en/economics/people/StaffDetails.html?personid=35968&hstf=35968

Stern School of Business, New York University ( email )

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HOME PAGE: http://www.stern.nyu.edu/faculty/bio/massimiliano-bonacchi

Antonio Marra

Bocconi University - Department of Accounting ( email )

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Milan, 20136
Italy

Paul Zarowin (Contact Author)

New York University (NYU) - Department of Accounting ( email )

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New York, NY 10012-1118
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