Private Equity Involvement and Earnings Quality

Abstract

This paper examines the relation between private equity (PE) investors' involvement and their portfolio firms' earnings quality. We operationalize earnings quality through comparative analyses of conditional loss recognition timeliness. For a sample of unlisted Belgian firms, we document that PE involvement increases a firm's willingness to recognize losses more timely compared to industry, size and life-cycle matched non-PE backed firms. Further, we find more powerful earnings quality effects for firms backed by independent and captive PE investment houses compared to firms backed by government-related PE. Finally, we find no systematic variations in earnings quality across different levels of PE ownership proportions. Our results are robust to the inclusion of various controls and are unaffected by the endogenous PE financing choice. The current results provide novel evidence towards the understanding of PE investors' governance implications for portfolio firms' earnings quality.

Keywords: Earnings quality, earnings conservatism, loss recognition timeliness, private equity

JEL Classification: G32, M13, M41