The Impact of Filing Micro-Entity Accounts and the Disclosure of Reporting Accountants on Credit Scores: An Exploratory Study
Accounting and Business Research, 49(6), pp.648-681, 2019
Posted: 19 Dec 2018 Last revised: 20 Aug 2019
Date Written: November 21, 2018
There is a dearth of evidence regarding the potential costs incurred by small private companies that opt to publish only an unaudited abbreviated balance sheet. This paper provides new evidence regarding whether UK companies that publish reduced balance sheet information in micro-entity annual accounts are allocated lower credit scores by a credit rating agency. Recently, for the smallest companies, a new exemption category for ‘micro-entities’ was introduced. Qualifying companies may elect to file even less unaudited balance sheet information than their small company counterparts. Consistent with the conjecture that publishing micro accounts conveys a negative signal to the credit scorer, there is systematic evidence that micro-entities are assigned worse credit scores. This result is robust to the employment of statistical methods that account for observed and unobserved bias. Based on both assurance and signalling tenets, the second novel conjecture examined in this study is that companies which disclose their annual accounts are prepared by an accountancy firm (reporting accountant) will attract higher credit scores. Contrary to extant research which reports that companies that opt for voluntary audits receive higher credit scores, there is no evidence that the credit scorer rewards companies whose accounts bear the imprimatur of a reporting accountant. Statistical methods employed in this paper include the Heckman treatment (endogenous selection) model; regression-adjusted propensity score matching models with the inclusion of Heckman inverse Mills ratios; and ordered probit endogenous selection models.
Keywords: credit scores, reporting accountants, matching models with the inclusion of Heckman inverse Mills ratios
JEL Classification: C10, C21, M40, M41
Suggested Citation: Suggested Citation