Does Public Ownership of Equity Improve Earnings Quality?

50 Pages Posted: 23 Apr 2007 Last revised: 27 Jul 2011

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Carla Hayn

University of California at Los Angeles - Anderson School of Management

Sharon P. Katz

INSEAD

Date Written: March 18, 2009

Abstract

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

Givoly, Dan and Hayn, Carla and Katz, Sharon P., Does Public Ownership of Equity Improve Earnings Quality? (March 18, 2009). Harvard Business School Research Paper No. 09-105. Available at SSRN: https://ssrn.com/abstract=981426

Dan Givoly

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Carla Hayn

University of California at Los Angeles - Anderson School of Management ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9225 (Phone)

Sharon P. Katz (Contact Author)

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

Register to save articles to
your library

Register

Paper statistics

Downloads
1,205
Abstract Views
3,846
rank
16,120
PlumX Metrics