Does Public Ownership of Equity Improve Earnings Quality?
Accounting Review, Forthcoming
50 Pages Posted: 23 Apr 2007 Last revised: 27 Jul 2011
Date Written: March 18, 2009
We compare the quality of accounting numbers produced by two types of public firms - those with publicly-traded equity and those with privately-held equity that are nonetheless considered public by virtue of having publicly-traded debt. We develop and test two hypotheses. The "demand" hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to stronger demand by shareholders and creditors for quality reporting. In contrast, the "opportunistic behavior" hypothesis posits that public equity firms, because their managers have a greater incentive to manage earnings, have lower earnings quality than their private equity peers. The results indicate that, consistent with the "opportunistic behavior" hypothesis, private equity firms have higher quality accruals and a lower propensity to manage income than public equity firms. We further find that public equity firms report more conservatively, in line with their greater litigation risk and agency costs.
Keywords: conservatism, earnings management, earnings quality, private and public firms
JEL Classification: M41, M43, M44, G32, K22
Suggested Citation: Suggested Citation