private company finance and financial reporting - · pdf fileprivate company finance and...
TRANSCRIPT
Electronic copy available at: https://ssrn.com/abstract=2871542
Private Company Finance and Financial Reporting
Ole-Kristian Hope
Rotman School of Management
University of Toronto
Dushyantkumar Vyas
Department of Management - UTM
Rotman School of Management
University of Toronto
December 1, 2016
Prepared for
2016 ICAEW Information for Better Markets Conference:
Private Company Financial Reporting
Abstract
This article provides a comprehensive assessment of private firms’ financing sources and their
impact on financial reporting practices. We consider debt financing (bank financing, leasing, and
government guarantees), equity financing (family ownership, government ownership, employee ownership,
and private-equity financing,), and trade credit (supplier credit and factoring). Our primary conclusions are
that there is significant heterogeneity in the way in which private companies are financed that is influenced
by their specific business contexts, and that this heterogeneity in financing is associated with differential
demand for and supply of financial reporting.
Key words: Private firms; financing; financial reporting quality; demand and supply factors
We acknowledge useful help from Muhammad Azim and Stephanie Cheng.
Electronic copy available at: https://ssrn.com/abstract=2871542
1
Private Company Finance and Financial Reporting
1. Private Firms and Accounting Information in Private Firms
This article focuses on what explains variations in financial reporting practices among private
firms, and in particular on the role of financing (broadly defined). We consider a broad range of
financing sources, including debt financing (bank financing, leasing, and government guarantees),
equity financing (family ownership, government ownership, employee ownership, and private-equity
financing), and trade credit (supplier credit and factoring). Our main conclusions are that there is
significant heterogeneity in the way in which private companies are financed due to their specific
business contexts, and that this heterogeneity in financing is associated with differential demand for
and supply of financial reporting. Preparers’ reporting incentives are consistent with this differential
demand for financial reporting by the various capital providers. While in many instances, variations in
financial reporting practices are explained using standard agency-theoretic considerations, the picture
is more nuanced in certain specific financing contexts such as family, government, and employee
ownership.
Before proceeding, it is important to recognize the importance of private firms in the economy
and discuss whether financial reporting matters for these firms. Without considering these questions
one could argue that it is not important to examine variations in financial reporting practices. Thus, we
provide discussions on these questions as well as a brief comparison between private and public firms
in this section.
1.1 The Importance of Private Firms
Whereas we have numerous studies on publicly-listed companies, the empirical evidence on
private firms is rather limited. We believe this is primarily due to data limitations, and a strong case can
2
be made for the importance of furthering our knowledge of privately-held companies.
First, private firms (i.e., firms that are not traded on public stock exchanges) are the predominant
organization in most countries. To illustrate the relative contribution of private firms to international
economic activity, Berzins, Bøhren, and Rydland (2008) show that, in the aggregate, nonlisted firms
have about four times more employees, three times higher revenues, and twice the amount of assets
than listed firms, and that these statistics are representative for most countries in the world. Furthermore,
more than 99% of limited liability companies are not listed on a stock exchange in most countries (e.g.,
Nagar, Petroni, and Wolfenzon 2011; Berzins, Bøhren, and Rydland 2008; Pacter 2004). To further
highlight the significance of private firms, according to the U.S. Census Bureau, there are 29 million
privately held companies in the United States, 7.6 million of which have paid employees, representing
one-half of the nation’s GDP.1 Similar statistics are found in many countries around the world.
In spite of their economic importance and likely differences from public companies,
comparatively little is known about financial reporting by private firms. We believe the primary reason
for this is limited data on private companies outside of Europe. In Europe, the filing of financial
statements with the relevant regulator is independent of the listing status whereas in for instance the
U.S. private firms do not have to file with any easily-available public registry. This provides not only
an opportunity in that researchers can focus more on Europe where data are widely available, but also
a limitation in that it is unclear whether inferences drawn from European settings generalize elsewhere.
Highlighting the interests in private companies and recognizing the potential differences from
public corporations, accounting standard setters have recently increased their focus on the need to better
understand the financial reporting requirements for small private companies. For example, the
International Accounting Standards Board has developed a separate set of financial reporting
requirements for small and medium enterprises (SMEs). In Canada, private firms can choose to use
1 http://www.aicpa.org/PRESS/PRESSRELEASES/2010/Pages/CouncilAdoptsResolutionSupportingBRP.aspx
3
either International Financial Reporting Standards or Private Enterprise GAAP beginning in 2011. In
the United States, the Private Company Council recently issued a guidance on the private-company
accounting project, Private Company Decision-Making Framework, which suggests that not all private
firms need to prepare financial statements under the same set of U.S. GAAP as public firms do and that
exceptions and alternatives should be allowed.
1.2 Financial Reporting Quality (FRQ) of Private versus Public Firms
Several recent studies consider whether private or public companies provide higher FRQ.
Private firms differ from publicly traded firms in several respects. They tend to have more concentrated
ownership although some large private firms can have relatively dispersed ownership. With greater
ownership concentration, large shareholders can take advantage of their controlling positions to derive
private benefits from personal consumption; this is a typical problem of expropriation of minority
shareholders and creditors (e.g., Morck, Shleifer, and Vishny 1988).
There are competing hypotheses on the FRQ of public versus private firms (e.g., Hope, Thomas,
and Vyas 2013). The “demand” hypothesis predicts that public firms have incentives to provide
financial information to meet the information demands of investors and creditors. These incentives arise
because public firms have greater ownership dispersion, greater owner-manager separation, and less
managerial ownership, resulting in higher agency costs. Public firms also face additional regulations
that limit private communication. For private firms, capital providers and other stakeholders are likely
to have greater insider access to relevant information and thus, they may rely less on financial-reporting
information.
The lower demand for (costly) accrual-based financial-reporting information of private firms is
often attributed to a lack of agency problems typically observed in public firms. For example, private
firms often have a single manager-owner and some capital providers (e.g., private equity providers)
4
who often take a direct role in helping manage the company (Chen, Hope, Li, and Wang 2011). Private
companies are also, on average, more reliant on bank financing than public firms. Because banks often
have direct access to inside information and continuous contacts with management, they may rely less
on the formal communication of accrual-based financial statements (Berger and Udell 1998). Further,
private companies may also have personal ties with lenders, who often are local financial institutions
(Vera and Onji 2010; Cole and Wolken 1995). As stated in the PCC’s Basis for Conclusion to the
Private Company Decision-Making Framework, “Many preparers of private company financial
statements said that the preparation efforts and audit or review costs of complying with some accounting
guidance that does not affect reported cash amounts or liquidity often are not justified considering the
limited benefits of reporting that information offers to users” (PCC 2013, paragraph BC13). Instead,
researchers state that private firms’ financial reports could reflect other objectives such as tax reporting,
dividend policy, or insurance requirements (Ball and Shivakumar 2005; Burgstahler, Hail, and Leuz
2006).
The “opportunistic behavior” hypothesis predicts that the FRQ of public firms is affected by
managers’ manipulative actions. Managers of public firms are subject to capital-market pressures to
meet earnings expectations and they often have equity-based compensation packages, resulting in a
greater incentive to manipulate reported earnings. Evidence in favor of the opportunistic behavior
hypothesis is more limited and confined to some studies that use either data from specialized industries
(e.g., Beatty and Harris 1998; Beatty, Ke, and Petroni 2002) or small samples (Penno and Simon 1986).
Although the evidence to date is not conclusive, we believe it is fair to say that the more recent
literature concludes that private firms on average have lower earnings quality than public firms (e.g.,
Ball and Shivakumar 2005; Burgstahler et al. 2006; Hope, Thomas, and Vyas 2013). Yet, we caution
readers about this conclusion as it is difficult to compare such different sets of firms. First, private and
public firms tend to be significantly different in terms of size and ownership concentration, so if the
5
researcher attempts to match on these dimensions the comparison is between a small subset of either
set of firms (either the largest private firms or the smallest public firms, or a combination of both).
Second, most prior research assumes that the FRQ measures developed for public firms are also relevant
for private firms. We consider this latter issue an interesting avenue for future research.
1.3 Does Accounting Matter in Private Firms?
If we believe the overall conclusion from above that private firms are likely to have (on average)
lower quality accounting than public firms, a natural question that arises is whether accounting matters
at all in private firms.
In our view, the fact that most prior research concludes that private firms display lower quality
financial reporting than public firms do, does not imply that accounting is “less important” for private
firms than for public firms. In fact, we view it as a promising area for future research to examine in
greater depth whether accounting is more or less useful in private firms. A secondary but rather
important question is whether private firms’ stakeholders have a similar notion of “high quality”
financial reporting as those of public firms. For example, it is possible that stakeholders only consider
“cash-flow predictability” to be an important attribute of FRQ for private firms, whereas the literature
on public firms highlights a much more multi-faceted view of FRQ that includes multiple aspects such
as restatements and meet-or-beat behavior. In this article, we take no stance on these questions.
However, we would like to raise some arguments to highlight the potential for accounting to be
especially important in private firms and provide some research findings on the benefits of high FRQ
for private firms.
Private firms typically disclose less non-accounting information, as such, there are fewer
competing sources of information (e.g., Hope, Thomas, and Vyas 2016), increasing the potential
importance of financial accounting information to external providers of capital in monitoring
6
managerial activities. In particular, there is much less coverage for private firms than public firms by
sell-side financial analysts, and prior research shows that analysts do not merely disseminate
information but also produce new information to the market. In addition, there is on average less media
attention (and media scrutiny) for private firms. Similar to analysts, journalists both interpret existing
information and produce new information for interested parties. Finally, given that private firms are not
listed on stock exchanges, they do not furnish the additional filings and updates that exchanges and
securities regulators require and often make publicly available. In conclusion, it is likely (at least
certainly possible) that accounting information comprises a larger percentage of the overall information
set about private firms than about public firms.
In addition, managerial activities of public firms are partially constrained by market-based
mechanisms. For instance, public firms are more susceptible to takeovers that help control for agency
conflicts (Lennox 2005). In the absence of market-based measures of firm-value as well as other sources
of information such as financial analysts, high-quality reporting may be particularly relevant for
evaluation of managerial performance to support personnel and compensation decisions. For example,
Indjejikian and Matejka (2009) emphasize the importance of accounting information in compensation
contracts for private firms. Similarly, McNichols and Stubben (2008) highlight the role that accounting
information plays in internal decision making. Finally, private firms are less likely to have separate
management accounting systems from financial accounting systems (e.g., Drury and Tayles 1995),
potentially enhancing the significance of accounting in firms' internal decision making. Consistent with
this notion, McNichols and Stubben (2008) emphasize how low-quality financial information implies
distorted information to decision makers that in turn leads to inefficient investment decisions.
While the above arguments raise the possibility of accounting being important in private firms,
we further provide direct evidence on the role of accounting in private firms. Given that the role of
auditing is discussed in a separate article at this conference, we will merely mention that prior research
7
provides evidence of the usefulness of auditing in a private firm context (e.g., Allee and Yohn 2009;
Hope, Thomas, and Vyas 2011; Minnis 2011; Clatworthy and Peel 2013; Kausar, Shroff, and White
2016; and others).
In a recent study, Hope, Thomas, and Vyas (2016) use a large sample of U.S. private firms and
show that accrual quality in private firms is associated with the ability of accruals to predict future cash
flows.2 Chen, Hope, Li, and Wang (2011) examine the role of FRQ in private firms from emerging
markets, a setting in which extant research suggests that FRQ is less conducive to the mitigation of
investment inefficiencies (i.e., countries with low investor protection, bank-oriented financial systems,
and stronger conformity between tax and financial reporting rules). In spite of such “tension,” using
firm-level data from the World Bank, the authors conclude that FRQ positively affects investment
efficiency. It is also often asserted that greater emphasis on taxes reduces the informational role of
earnings and that the focus on tax minimization is more pronounced for private firms. However, there
is very little empirical evidence on this issue to date. An exception is the trade-off analysis offered by
Chen, Hope, Li, and Wang (2011). Specifically, Chen et al. (2011) find that the relation between FRQ
and investment efficiency is decreasing in the incentives to minimize earnings for tax purposes, a
connection that prior literature has merely asserted but not tested.
Furthermore, a more significant benefit of providing higher-quality FRQ is perhaps the access
to debt financing with favorable terms. While Section 2 extensively reviews the literature on the impact
of debt financing on private firms, representative examples of such studies include Van Canegham and
Van Campenhout (2012) and Vander Bauwhede, de Meyere, and Van Cauwenberge (2015), in which
authors report that higher accounting quality reduces borrowing costs. Consistent with these findings,
Chen et al. (2011) also show that the effect of FRQ on investment efficiency increases in bank financing.
2 In an earlier version of that paper, the authors also showed a positive association between FRQ and investment efficiency
for the same sample of firms.
8
In conclusion, the evidence presented above suggests that (1) private firms are important to the
economy and that (2) accounting information is indeed economically important for private firms. In our
next and primary chapter, we focus on what explains the variations in the FRQ among private firms.
Specifically, we focus on the heterogeneity in financing sources within private firms — we predict that
different capital providers (e.g., families, governments, private-equity firms, banks, and suppliers) face
differential agency conflicts and information asymmetry, and thus, they have differential financial
reporting needs. The examination of financing heterogeneity within private firms is a natural extension
of the literature that has examined the more basic public-private contrast. The evidence discussed in the
next chapter is largely consistent with the notion that the reporting incentives of preparers respond to
the differential demand for financial reporting by various capital providers.3
2. Impact of Financing Sources on FRQ in Privately-Held Firms
Privately-held firms obtain their financing from a variety of sources. Traditional sources of
funding include, inter alia, debt financing (including bank financing, leasing, and government
guarantees), equity financing (including family ownership, government ownership, private-equity
financing, and employee ownership), and trade credit (including supplier credit and factoring). We also
consider other non-traditional and new online sources of funding such as crowdfunding. Despite the
array of potential sources, external financing constraints remain particularly acute for private firms as
they are typically smaller and less established compared to public firms (Gross and Verani 2013), and
because they by definition do not have access to public equity.
While the impact of ownership structure has been investigated in a variety of contexts for public
firms, an examination within private firms is relatively new. Private firms differ from public firms in a
3 A general caveat is that many of the studies we discuss are published in lower-tier journals and thus not subject to as
stringent review process as articles published in top journals.
9
number of important ways. Private firms tend to be more closely held, have less formal governance
mechanisms, and have greater managerial ownership. Moreover, major capital providers often have
insider access to corporate information (e.g., banks) and could take a more active role in management
(e.g., venture capitalists). Thus, factors that affect accounting in public firms may not affect accounting
in private firms in the same way.
We examine the impact of the various financing sources on firms’ financial reporting choices.
We first begin with a discussion of debt financing (particularly bank lending, leasing, and government
credit guarantees), followed by a discussion of equity financing (beginning with a discussion of two
dominant concentrated ownership types — family and government ownership, followed by private
equity and venture capital financing), trade credit (including supplier credit and factoring), and finally
end with a new online alternative source of financing — crowdfunding. For each source of funding, we
first begin with a brief background and discuss the economic incentives and conflicts created by the
funding structure, followed by a discussion of the impact of these economic incentives on firms’
financial reporting choices.4
2.1. Debt Financing
2.1.1. Background
Given their lack of access to public capital markets, the capital structure of privately-held firms
naturally comprises a combination of private equity and/or private debt. Further, considering the fact
the availability of private equity tends to be concentrated in certain industries, geographies, or firm life-
cycle stages, it is easy to conjecture that private firms are, on average, more leveraged than publicly
listed firms (this idea is supported by descriptive statistics for U.K.-based firms reported in Agkuc,
4 Other stakeholders (that do not provide financing, at least not directly) may also affect firms’ financial reporting choices,
such as lobby groups, media, competitors, tax authorities, and domestic and foreign regulators (e.g., Hope, Ma, and Thomas
2013; Akamah, Hope, and Thomas 2016). We do not discuss these non-finance determinants of variations in FRQ in this
article.
10
Choi, and Kim 2015, and for U.S.-based private-equity firms in Badertscher, Givoly, Katz, and Lee
2015). This implies that, relative to public firms, debt financing is likely to be more important in private
firms (Berger and Udell 1998; Brav 2009), and that demand from creditors is likely to be a key
influencer of private borrowers’ FRQ.
The impact of debt financing on firms’ financial reporting choices arises from two distinct
mechanisms. The first mechanism is generally applicable during the credit-granting decision stage and
pertains to the role of financial reporting in reducing informational frictions faced by external providers
of capital. This channel predicts that lenders demand high quality accounting reports from borrowers
to reduce their information risk in forecasting future cash flows.5 The second mechanism pertains to
subsequent ongoing monitoring by lenders — lenders demand high-quality financial reporting to
increase debt-contracting efficiency. An extensive literature in financial economics has studied lenders’
reliance on covenants to mitigate the agency conflicts between stockholders, managers, and
bondholders (e.g., Jensen and Meckling 1976; Myers 1977; Smith and Warner 1979; Aghion and Bolton
1992; Haugen and Senbet 1988). Borrowers are commonly required by banks to comply on an ongoing
basis with “maintenance” covenants that are based on financial ratios derived using GAAP-compliant
accounting numbers. Violation of covenants results in transfer of control to the creditors. However, the
efficacy of these financial ratio-based covenants to appropriately allocate state-contingent control rights
(and accordingly, the efficiency of these debt contracts) rests on the quality of the underlying accounting
numbers — low-quality accounting metrics will not be sufficiently reflective of the underlying state
(Aghion and Bolton 1992).
These two mechanisms apply generally to both public and private firms, and suggest that firms
obtaining debt financing will signal credible financial information to lower their cost of capital, as well
5 Paper such as Francis, LaFond, Olsson, and Schipper (2005) and Bharath, Sunder, and Sunder (2008) have studied the
relation between FRQ and price- and non-price debt contractual terms for public firms.
11
as produce high-quality financial statements subsequently for ongoing monitoring of covenant
compliance by banks.6 Note, however, that this statement is not tautological — as Berger and Udell
(1998) suggest, non-accounting information is also frequently used by lenders for credit appraisal and
may well be more important for small privately-held firms.7 In addition, firms may engage in earnings
management to avoid breaching covenants.
2.1.2. Usefulness of borrowers’ financial reporting to banks
Survey evidence suggests that bankers frequently require provision of financial reporting
information by privately-held borrowers. For example, Collis and Jarvis (2000) survey managers of
small companies based in the U.K. and report that 69% of the firms in their sample provide their
statutory accounting reports to banks and other capital providers. Collis and Jarvis (2002) confirm the
role of bank financing in borrowers’ financial reporting and report that statutory accounting reports are
useful for maintaining relationships with banks. Collis (2008) provides a survey of small private
companies and reports that a majority of respondents (64%) consider published accounts to be useful
to creditors.8,9 While the studies cited above suggest that bankers demand high-quality financial
statements to improve the ex-ante efficiency of their credit-granting decision, Goncharov and
Zimmerman (2007) show that Russian private firms may have incentives to manage earnings
subsequently in response to banks’ monitoring activities.
Findings on the usefulness of financial reporting to bankers are evidently varied and contextual
— for example, the CAN Interpreta (2011) pan-European survey suggests that information other than
6 Note that loan covenants are common even among small private firms (Niskanen and Niskanen 2004). 7 Relationships between management and bankers are often also very important, perhaps especially in less-developed
countries. For example, Hope, Yue, and Zhong (2016) find that after political connections (a form of relationship) are cut
off for Chinese firms (due to Rule 18), firms respond by increasing their FRQ to better access financing. In other words,
they find evidence of a substitute relation between such relationships and FRQ. 8 In an archival study that spans 13 European countries, Peek, Cuijpers, and Buijink (2010) suggest that compared to public
firms, creditors of private firms rely more on relationship lending, and less on financial-reporting information to mitigate
shareholder-creditor conflicts of interest. 9 Complementary survey evidence is provided by Kitchling, Kasperova, and Collis (2013) —credit-management
professionals in the U.K. suggested that furnishing full statutory accounting data yield improvements in credit ratings.
However, the authors fail to observe a similar response among small-company respondents.
12
accounting reports — such as commercial reports and banking information — were more useful among
the respondents. Howorth and Moro (2012) also report anecdotal evidence from Italy that suggests that
bank managers do not consider statutory financial reporting information to be very useful as such
information can be influenced by tax strategy and other extraneous considerations.10 Cassar, Ittner, and
Cavalluzo (2015) study lending decisions to small U.S. borrowers and find while that use of accrual
accounting does not impact the loan approval or denial decision, conditional on approval, accrual
accounting usage is associated with a lower interest rate on loans. Minnis and Sutherland (2015) employ
a database of small commercial bank loans and document an interesting U-shaped relation between
borrower risk and demand for financial statements by banks — arguing that financial statements - based
monitoring is not incrementally beneficial for reputed low-risk borrowers, and that it is not credible for
high-risk borrowers with little to lose by way of reputation. The authors further uncover a
substitutability between demand for tax returns and financial statements.
The literature discussed above has extensively examined the usefulness of financial reporting
for bank lenders, but there is little systematic evidence on what constitutes useful or high quality
financial reporting from the bankers’ perspective. We believe that this is an interesting question for
future research; this question might be addressed through carefully conducted field studies or
interviews.11
10 Bigus, Georgiou, and Schorn (2015) study the earnings quality of German private firms, and find that unincorporated
firms have a lower incentive to use financial reporting as a means of maintaining their relationship with lenders compared
to their incorporated counterparts (this result is attributed to the fact that lenders of unincorporated firms have an additional
layer of security via recourse to owners’ assets). 11 Another interesting avenue for future research pertains to credit unions (a segment of the banking sector). The importance
of credit unions in small business lending has increased sharply in the U.S. during the past decade, and has tended to partially
offset the declines in business loans at traditional commercial banks (Wilcox 2011). Credit unions typically operate within
pre-defined geographical and/or sectoral mandates, and accordingly have the potential for utilizing their specific local
knowledge and business insights to lend to private firms that are small and informationally opaque (Whittam, Talbot, and
Mac an Bhaird 2015). We consider it an interesting area for future research to examine the differential weight placed by
credit unions on traditional financial statement information vs. sector-specific or local geographical information.
13
2.1.2. FRQ and bank-loan contracting outcomes
A large portion of the literature derives inferences concerning demand and supply of financial
reporting information by private firms by examining the realized loan outcomes of these firms. For
example, Blackwell, Noland, and Winters (1998) examine a sample of 212 revolving credit agreements
pertaining to small U.S. private firms, and report that firms that have audited financials pay lower
interest rates. Employing a sample of small U.S. private firms with data from the National Survey of
Small Business Finances, Allee and Yohn (2009) find that firms that prepare accrual-based accounting
statements receive debt financing at interest rates that were on average lower by 70 basis points lower
than other firms in the sample. Minnis (2011) reports similar findings that audited U.S. private firms
enjoy a cost of debt that is lower by 69 basis points pointing toward a certification role for audits.
Similarly, Hope, Thomas, and Vyas (2011) use a sample of private firms from 68 countries to document
that that private firms with audited financials face lower financing costs and constraints. Gassen and
Fuelbier (2015) examine a dataset comprising European private firms during 1998 to 2007 and show
that firms with higher levels of debt have greater income smoothing, and this relation is stronger in
countries with higher bankruptcy and contract-enforcement costs (see also Hope 2015). Their findings
are consistent with creditors demanding more income smoothing for contracting-efficiency reasons.
Chi, Dhaliwal, Li, and Lin. (2013) study the voluntary filing of financial statements by Taiwanese
private companies, and find that voluntary filers enjoy a lower cost of debt.12
The literature cited above comprehensively links FRQ to loan interest rates; however, we
believe that future work could move beyond this simple relation on multiple dimensions. For example,
12 A number of studies infer FRQ using audit-related measures. Van Canegham and Van Campenhout (2012) analyze
Belgian private company data and find that information quality and quantity (measured using auditing measures) are
positively related to financial leverage. Vander Bauwhede, de Meyere, and Van Cauwenberge (2015) examine a sample of
Belgian private firms from 1997 to 2010 and report that accruals quality reduces borrowing costs. Karjalainen (2011)
examines Finnish private firms during 1999-2006 that firms with higher quality audits (such as those conducted by a Big 4
auditor or reputed audit personnel) and higher accruals quality receive a lower cost of debt. Koren, Kosi, and Valentincic
(2014) report somewhat contradictory findings using a sample of Slovenian small private firms — firms with voluntary
audits are associated with a higher cost of debt suggesting an unresolved endogeneity in voluntary audit choice. A recent
14
what is the relative importance of various loan terms such as interest rates, covenants, collateral,
maturity, and personal guarantees for bank lending to private firms, and how does the collective set of
loan terms vary with FRQ?
2.1.3. State-owned banks
This section focuses on lending by an important subset of banks — state- or government-owned
banks. The share of state-owned banks in total banking assets increased during most of the twentieth
century, reaching a share of 67% in 1970, but subsequently declining sharply to 41% in 1995, and
further down to 22% in 2009 (La Porta, Lopez de Silanes, Shleifer, and Vishny 2002; World Bank
2013). Despite this decline, state-owned banks remain dominant in important developing countries such
as China, India, and Egypt. The financial crisis reinvigorated interest in state-owned banks — observers
argue that state-owned banks do not suffer from the painful procyclicality observed in private bank-
lending activity — the cushion of a stable deposit bank and government backstops allow them to
maintain lending to important economic and social sectors during economic downturns (e.g., Rudolph
2009, 2010; Micco and Panizza 2006; Bertay, Demirgüç-Kunt, and Huizinga 2012). As small private
firms appear to have been more adversely impacted by the retrenchment of bank lending during the
crisis (OECD 2009), the role of state-owned banks is especially pertinent.
The potential alleviation of the consequences of a general failure of the private bank sector is
what Sapeinza (2004) describes as the “social view” of government-bank ownership, where state-
owned banks contribute to general socio-economic welfare and development. Sapienza (2004) also
describes two countervailing negative views. The “political view” of state-owned banks considers such
study by Kausar, Shroff, and White (2016) exploits a natural experiment involving U.K. private firms and shows that
voluntary choice of an audit by private firms conveys incremental information about the firm’s type to external capital
providers. Lisowsky and Minnis (2013) also examine the choice of voluntary audit among U.S. private firms and report a
positive association between debt levels and the presence of audited U.S. GAAP financial statements. Lennox and Pittman
(2011) report similarly supportive evidence that after auditing became voluntary for a certain population of small U.K.
private firms in 2004, those that continued to be audited voluntary received higher credit ratings, which has implications for
the cost of debt financing. Dedman and Kausar (2012) also report a similarly positive relation between retention of voluntary
audit and credit ratings for the sample of small U.K. private firms for which auditing became voluntary in 2004.
15
entities to be inefficient compared to private-sector banks, suggesting that they are used by politicians
to inefficiently tunnel resources to their friends and families or pet projects supporters. The “agency
view” suggests that even if these entities are created with a “social view,” bureaucratic agency costs
prevent efficient monitoring of bank managers and could lead to corruption in the banking sector.
Further, state-owned banks, riding on government support, could crowd out the private sector and
render the overall banking industry inefficient in the long run.13
What sort of financial reporting incentives do state-owned banks engender for prospective and
existing borrowers? This could be an interesting avenue for future research. On one hand, do state-
owned banks’ informational needs pertain to whether or not a social objective is fulfilled, rather than
cash-flow predictability? In that case, traditional metrics of FRQ are likely to be meaningless (and
instead be replaced by an emphasis on CSR reports). On the other hand, if state-owned banks are
professionally managed and conduct regular monitoring of the borrowers, then they might instead have
a positive effect on FRQ.
2.1.4. Government loan guarantees
As discussed earlier, private firms are generally less established compared to their public
counterparts, and accordingly experience greater constraints while accessing bank lending (Zecchini
and Ventura 2009; Green 2003; Roper 2011). Empirical evidence suggests that government credit
guarantees improve the likelihood of accessing bank credit for small businesses — evidence includes
Riding, Madill, and Haines Jr. (2007) in Canada, KPMG (1999) in the United Kingdom, Zecchini and
Ventura (2009) in Italy, Boocock and Shariff (2005) in Malaysia, Usegi, Sakai, and Yamashiro (2010)
in Japan, and Lelarge, Thraer, and Sesmar (2008) in France. As a natural extension, researchers have
also tried to study whether this alleviation of financing constraints via loan guarantees impacts the
13 Which of these three views dominates surely depends upon specific institutional context. However, Berger and Udell
(2006) summarize a large empirical literature that, at least in stable economic times, is suggestive of an on-average negative
effects of state-ownership in terms of non-performing loans of the banks and overall effects on credit availability and
economic performance.
16
performance and default probability of recipient firms and has reported mixed evidence. For example,
Arraiz, Melendez, and Stucchi (2011) report that a higher growth in employment and output upon
participation in a Colombian loan-guarantee program, but finds no improvement in investments or
productivity. Similarly, Oh, Li, Heshmati, and Choi (2009) report growth in sales, employment, and
wage levels among firms participating in Korean credit-guarantee programs, but find no evidence of an
impact on productivity, R&D, or investment intensity. For participants in a French program, Lelarge et
al. (2008) report improvements in employment and investment growth, but note that the participant
firms subsequently exhibit higher default probability. Similar deterioration in default rates is also
documented by Usegi et al. (2010) for a sample of Japanese firms and by Cowan, Drexler, and Yanez
(2008) for a sample of Chilean firms, suggesting that as a negative by-product of lowering banks’ risk
exposures, there may be a decrease in bank-monitoring incentives — that banks have lower incentives
to monitor loans guaranteed by government schemes rather than borrowers’ personal guarantees.
To the best of our knowledge, research evidence does not exist on the role of financial reporting
in the context of government credit guarantees. We appeal to agency theory and propose the following
testable hypotheses: (a) firms that make a better case for their contribution to governmental social and
economic policy objectives, such as by reporting figures on local job creation and social-responsibility
initiatives, can achieve greater success in accessing credit through governmental guarantee schemes,
(b) transparency through a variety of channels (such as a clear website with biographies of the owners
and business objectives) can improve the likelihood of funding, and (c) improved financial reporting
transparency can mitigate minority investors’ concerns about dilution in bank monitoring due to
government guarantees.
2.1.5. Leasing
While bank lending is the predominant source of financing for private firms, small private firms
that are informationally opaque face significant constraints to bank-financing access (ECB 2012; OECD
17
2006). A Euro-area survey (ECB 2012) suggests that leasing is the third-most important source of
financing for SMEs in Europe behind traditional bank loans and other forms of revolving bank credit.
Leasing can be seen as a type of asset-based financing — the lessor lends an asset to the lessee for a
contractually determined duration in exchange for contractually pre-determined payments (IAS 17).
Variations in contractual structures notwithstanding, leasing involves separation of legal ownership and
economic use of the asset. The lessor retains legal ownership of the leased asset, and accordingly the
asset serves as a collateral for this type of financing.14
Leasing is an attractive financing alternative for young and small informationally opaque firms
with high growth needs (Ayadi 2009; Oxford Economics 2011; Sharpe and Nguyen 1995; Eisfeldt and
Rampini 2008) — for such firms, severe information asymmetry deters unsecured lending, and posting
different types of firm assets as collateral might turn out to be prohibitively expensive due to growth
needs. Gallardo (1997) suggests that as opposed to a cash lender who is concerned about both the
principal and the interest, a lessor is primarily concerned about the ability of the borrower to make
periodic lease payments.15
For young firms, the risk of adverse selection is acute. However, leased assets are also vital to
business operations, making any default very costly for the lessees. It can also be argued that the lessor
owns the asset and accordingly understands the underlying industry and asset markets better than a
traditional bank (Schmit and Stuyck 2002). The leased asset serves as a de-facto collateral, further
lowering the credit risk faced by the lessor. Studies confirm that leasing represents a lower credit risk
compared to other forms of financing (e.g., Schmit 2005; De Laurentis and Mattei 2009). On the
demand side, leasing can be attractive to lessees due a variety of different price, accounting, regulatory,
and timing reasons (Oxford Economics 2011).
14 In addition to greater security, Sharpe and Nguyen (1995) and Eisfeldt and Rampini (2008) argue that lessors receive a
higher priority in bankruptcy due to legal ownership of the asset. 15 The spectrum of risks and rewards of ownership that are transferred to the lessee increases from leases that are classified
for accounting purposes as “operating leases” to those that are classified as “financing” or “capital leases.”
18
A relatively large body research examines the structuring of leases as either operating or capital
leases to enable achievement of off- vs. on-balance sheet accounting treatment for publicly-listed
companies in the U.S.16 Lasfer and Levis (1998) is an example of a U.K.-based study that examines the
determinants of leasing for both public and private firms, and documents the importance of taxes, capital
investment intensity, firm size, and leverage in determining the leasing decision. However, the study is
careful in suggesting that these determinants vary by firm size (which could be argued as a proxy for
the external financing opportunity set), and that small firms with high-growth potential are particularly
likely to use leasing as a source of financing. Bathala and Mukherjee (1995) survey a group of small
U.S. firms (potentially some are privately-held) and show that manufacturing firms (in their sample)
exhibit high growth and are highly leveraged are likely to use lease financing. Their surveyed firms also
suggest off-balance sheet accounting treatment as an advantage of leasing. Beatty, Liao, and Weber
(2010) examine the lease-vs.-buy decision for a sample of U.S. listed firms and report that low-
accounting quality firms exhibit greater use of leasing, and that this relation is diminished when
traditional bank lenders have greater incentives and ability to monitor the borrowers’ investments. An
extension of Beatty et al. (2010) in the private-firm setting could provide interesting future research.
Also, while the literature has tended to concentrate on the leasing decision, we are not aware of work
in accounting that examines the role of financial reporting in impacting the cost and other terms of lease
financing. Future research can also shed light on what specific aspects of lessee FRQ matter to lessors
vs. traditional bank lenders.
16 Examples of these studies that examine the value relevance of operating leases include Ro (1978), Bowman (1980), El-
Gazzar (1993), Ely (1995), Sengupta and Wang (2011), Cotton, Schneider, and McCarthy (2013), Dhaliwal, Lee and
Neamtiu (2011), Andrade, Henry and Nanda (2011), and Altamuro, Johnston, Pandit, and Zhang (2014).
19
2.2. Equity Financing
2.2.1. Family ownership: Background
The importance of family firms to the global economy is well documented — family businesses
generate 70 to 90% of global GDP (Family Firm Institute 2008). Che and Langli (2016) report that 80%
of U.S. businesses are family firms, contributing over half of the U.S. GDP. The importance of family
firms is similarly high in other parts of the world, accounting for 44% of large firms in Western Europe,
and over two-thirds of firms in East Asia (Cheng 2014; Prencipe, Bar-Yosef, and Dekker 2014;
Claessens, Fan, and Lang 2000). Family firms permeate all important sectors of the economy, including
the heavily-regulated utilities and financial industries (Chen, Chen, and Cheng 2008). While there is no
singular definition of family firms, they are commonly defined as firms in which the founders and their
family members or descendants occupy top positions in the firms’ management, serve on their board of
directors, or are controlling shareholders or blockholders (Cheng 2014).
Family firms are characterized by three important features (Cheng 2014). First, family owners
have concentrated equity ownership in their firm, but unlike other blockholders who may be
professional equity investors, family owners are typically poorly diversified and as a result have a lot
of “skin in the game” — their personal wealth is directly impacted by their corporate decisions. Second,
family owners typically have investment horizons that are longer than other active blockholders,
primarily due to the fact that family businesses are passed on from one generation to the other (e.g., the
Ford family has been actively involved in management for multiple generations). Third, founding
families are actively involved in managing their companies and typically occupy senior management
positions such as the CEO position, and often appoint family members on the company’s board of
directors (Anderson and Reeb 2003, 2004). As discussed below, this active involvement in firm
20
management substantially mitigates the typical owner-manager agency conflict and ensures that
founding families’ business interests and preferences are well-protected.
These unique characteristics of family firms influence the prevalence and extent of agency
conflicts between various stakeholders in the firm. First, family firms’ concentrated and undiversified
equity-portfolio holdings imply that the typical free-rider problem that firms with diversified holdings
face is substantially mitigated for family firms (Shleifer and Vishny 1986). Family owners have strong
incentives to monitor the firm’s management, thereby mitigating the common shareholder-manager
conflict of interest (Jensen and Meckling 1976; Hope, Langli, and Thomas 2012). Second, the negative
side of concentrated ownership is the potential for controlling shareholders to extract “private benefits
of control” (e.g., pursuit of value-destroying pet projects and direct wealth expropriation) at the expense
of minority shareholders (Shleifer and Vishny 1986; Demsetz 1983). This potential is exacerbated in
instances where family owners enjoy control rights that are disproportionate to their cash-flow rights.
Accordingly, whereas the family-ownership structure mitigates shareholder-manager conflicts, it has
the potential to exacerbate majority-minority shareholder conflicts. Third, due to the inter-generational
nature of family businesses, family owners are less concerned about short-term career concerns and
have a significantly longer-term investment horizon compared to other firms. This long-term orientation
of family firms spills over into long-term business relationships with other stakeholders as well (such
as trade partners and bankers).
Empirical evidence on economic consequences of family ownership
The agency conflicts discussed above are particularly acute for large firms with professionally
hired (external or non-family) management, and widely dispersed minority shareholders. In other
words, the ability of family ownership to mitigate or exacerbate agency conflicts is most likely to be
prevalent in publicly-listed firms. Accordingly, it is not surprising that research evidence on family
firms has tended to focus on founding families’ influence on listed firms. However, this research focus
21
also be driven by data-availability considerations. We direct readers to Hope (2013), Cheng (2014), and
Prencipe et al. (2014) for comprehensive reviews.
The relation between family ownership and firm performance is of first-order importance.
Consistent with family ownership mitigating agency conflicts and enabling a long-term investment
horizon, some studies conducted using publicly-listed firms report a positive relation between family
ownership and firm performance (Anderson and Reeb 2003; Lee 2006 and Maury 2006), while some
others report a negative relation (Stewart and Hitt 2012). Similarly, the limited evidence on private
family firms also sheds a nuanced picture. Sciascia and Mazzola (2008) and Westhead and Howorth
(2006) do not find a significant relation between family ownership and firm performance among Italian-
and U.K-based private companies. Che and Langli (2016) report a U-shaped relation between family
ownership and performance for a sample of Norwegian privately-held family firms. Che and Langli
(2016) also find that firm performance is positively related to the ownership of the second-largest
owner, percentage of family members on the company’s board, and the power of the family. Arosa,
Iturralde, and Maseda (2010) analyze Spanish private firms and document that the relation varies with
the family generation (first or subsequent) that is managing the business.
The collective research evidence on listed family firm suggests that such ownership has
beneficial corporate governance effects and is associated with higher FRQ. For example, Wang (2006)
finds that among S&P 500 constituents, family firms exhibit higher earnings quality than non-family
firms. Tong (2007) and Jiraporn and Dadlt (2009) report supportive evidence using samples of S&P
500 and S&P 1500 firms respectively. Ali, Chen, and Radhakrishnan (2007) also use a sample of S&P
500 companies and report higher earnings quality in family firms than non-family firms. However, they
find that family firms disclose less information than non-family firms (see also Chen, Chen, and Cheng
2008). Using a sample of Italian listed firms, Prencipe, Bar-Yossef, Mazzola, and Pozza (2011) find
less income smoothing behavior among family-controlled firms. Cascino, Pugliese, Mussolino, and
22
Sansone (2010) also analyze Italian listed firms and report that family ownership is associated with
higher earnings quality.
Research evidence concerning financial reporting by privately-held family firms is more
limited, and often focuses on auditing. For example, Hope, Langli, and Thomas (2012) utilize detailed
data on private-firm financials and family relationships from Norway to study the relation between
auditor effort and agency conflicts, and document that the agency conflicts vary systematically with
family involvement.17 Carey, Simnett, and Tanewski (2000) examine privately-held family firms in
Australia, and show that the prevalence of external auditing (a measure of financial reporting
credibility) in family firms is positively associated with the extent of agency conflicts within the firm
and with the level of debt. Niskanen, Karjalainen, and Niskanen (2010) study small Finnish privately-
held firms and report that family ownership is negatively correlated with usage of Big 4 auditors (a
proxy for audit quality). Stockmans, Lybaert, and Voordeckers (2010) study Flemish private SMEs and
report that while family owners (especially first-generation owners and founders) prioritize
nonpecuniary goals, they are prone to upward earnings management to mask negative performance (and
to avoid a decrease in their “socioemotional wealth” which is akin to reputational capital).
2.2.2. Government ownership: Background
The aftermath of the financial crisis has witnessed a spirited debate on regulation and the extent
to which governments should be involved in businesses. As Hope (2013) details, state ownership is not
new nor is it confined to Europe or Asia — governments all around the world have looked at promoting
economic growth at varying points in time by supporting businesses through a variety of financing
means. While the involvement of governments in businesses gained traction globally during the 1900-
17 Specifically, Hope et al. (2012) analyze auditors’ increase of effort and firms’ choice of auditors in situations with higher
level of agency conflicts. For a large sample of private firms, they use unique data to measure direct and ultimate ownership
for each shareholder as well as extended family relationships. They find that audit fees vary as hypothesized with firm-level
characteristics related to ownership structures and family relationships. Second, they show that firms in higher agency-cost
settings respond by hiring a Big-4 auditor.
23
1970 period, the past few decades leading up to the crisis in 2008 witnessed large-scale privatizations
and general retrenchment of the government from businesses in developed countries (The Economist
2012). However, the narrative has become more nuanced recently, with many looking toward the
phenomenal growth of China and other East-Asian countries as shining example for the success of
“state capitalism” (The Economist 2012; Hope 2013). These means of government financial support
include (a) direct ownership of a firm’s equity and (b) indirect support by way of credit guarantees,
subsidies, and tax credits.
Perhaps the most visible form of government involvement is ownership of equity. Some of the
world’s most influential business entities are state-owned (defined as firms in which the government
has a significant equity stake). Notable examples in the energy sector include Gazprom from Russia,
Statoil from Norway, and China National Petroleum Corporation from China in the energy sector. State
ownership is widespread across non-energy industries as well — ranging from railways (e.g., Amtrak
and Indian Railways) to mobile communication (e.g., China Mobile and BSNL India) to ports (e.g.,
Dubai Ports Authority). These government-owned behemoths are influential in the global economy and
by virtue of their size and importance they tend to be publicly listed.18
Empirical evidence on state-owned enterprises (SOEs)
Extant literature has demonstrated both theoretically and empirically that ownership structure
plays an important role in shaping corporate governance and firm performance (e.g., Shleifer and
Vishny 1997). Much of the research evidence on the effects of government ownership has tended to
focus on publicly-listed firms. This is not surprising given data limitations. These data limitations
appear to be especially acute for in the context of government-owned firms, as empirical evidence on
18 Another form of government support that is more pertinent to smaller privately-held companies pertains to government
programs that are meant to ease firms’ access to financing. Examples include small-business financing programs that
guarantee a certain percentage of bank loans as long as some qualifying criteria are met (such programs are operational,
with varying degrees of success, in developed countries such as Canada, the U.K., and the U.S., as well as in developing
countries such as Ghana, Croatia, Tanzania, and India). We discuss such findings in the section on debt financing.
24
unlisted government-owned firms is virtually non-existent. Accordingly, the evidence presented below
largely pertains to listed state-owned firms, followed by conjectures on how government ownership is
likely to differentially impact privately-held firms.19
Much of the empirical research on state-owned enterprises has tended to focus on China,
primarily because it has one of the highest percentage of SOEs in the world (Hope 2013). The state,
directly or indirectly, is the controlling shareholder in almost a third of Chinese listed companies (Tian
2001). The evidence from China on the linkages between state ownership and firm performance has
been mixed (Wang and Judge 2011).20
Several papers document differences in financial reporting incentives between Chinese SOEs
and non-SOEs, especially around IPOs. These studies provide interesting evidence on the reporting
incentives of private firms just before they switch their listing status. For example, Chen, Wang, and
Wei (2015) study 437 Chinese IPO firms and report a lower level of earnings management around IPOs
by SOEs compared to non-SOEs, and that better access to bank financing (i.e., lower financing
constraints) for SOEs is the underlying factor that reduces the need for managing earnings. Aharony,
Lee, and Wong (2000) examine earnings management around 83 IPOs by Chinese SOEs between 1992
19 Hope (2013) discusses two countervailing forces that arise due to government ownership. First, according to the property-
rights theory, unlike family ownership, state ownership does not incentivize the firm managers to purse profit maximizing
strategies as the state owns the controlling stake in the firm (Hart and Moore 1996). It is also not clear whether profit
maximization or specific social objectives constitute the objective function of state-owned firms; accordingly, it remains
unclear whether state-owned firms would penalize shirking by managers in the same way as private firms. However,
arguments could be made that striving to achieve certain social objectives, without necessarily emphasizing on cost
minimization or profit maximization has the potential of having benefits for delivering higher quality service to certain
sections of the society (e.g., Hart, Shleifer, and Vishny 1997). However, as Schmidt (1996) argues, there is a trade-off
involved — there could be too much state interference for political reasons that could be masked under the social-policy
umbrella (see also Boardman and Vining 1989; Megginson et al. 1994; Shleifer 1998). 20 On the negative side, Bai, Liu, Lu, Song, and Zhang (2004), Xu and Wang (1999), and Qi, Wu, and Zhang (2000)
document a negative relation between firm performance and government ownership, whereas Tomasic and Andrews (2007)
report survey evidence in which participants outline a lack of minority shareholder protection. However, governments are
also more likely to be long-term oriented and provide financing across the business cycle; accordingly, some studies such
as Chen and Gong (2000) report a positive correlation, whereas others such as Tian and Estrin (2008), Tian (2001) and Hess,
Gunasekarage, and Hovey (2010) find a more nuanced U-shaped relation between government ownership and market value.
With regards to differences in managerial incentives between SOEs and non-SOEs in China, s Kato and Long (2006) find
that pay-performance sensitivity is lower for SOEs compared to other firms. Firth, Fung, and Rui (2007) document that
SOEs are likely to have CEOs who are former bureaucrats and exhibit lower management quality. Conyon and He (2011)
find that SOEs have a lower level of CEO compensation and incentives and are less likely to fire CEOs for poor performance.
25
and 1995, and document that earnings management behavior as observed through pre-IPO accruals and
post-IPO ROA decline is statistically significant in unprotected or more competitive industries that are
less likely to be favored by the state in the IPO-selection process (protected industries such as energy
and raw materials are favored by the state and thus they need not manage earnings to be selected for an
IPO). Wang and Yung (2011) report that SOEs benefit from government protection and are accordingly
less inclined to manage earnings (see also Ding, Zhang, and Zhang 2007). Chen, Chen, Lobo, and Wang
(2011) examine Chinese listed firms and document that the effects of audit quality on earnings
management and cost of equity capital are more pronounced for non-SOEs than for SOEs.21
The evidence on unlisted SOEs is rather sparse. Capalbo, Mollica, and Palumbo (2014) examine
a sample of 5,349 private Italian SOEs and report that while these firms engage in earnings
management, the extent of earnings management is lower than non-SOEs. We believe that while most
of the studies reviewed above largely pertain to Chinese companies just prior to or post public listing,
the implications apply broadly to privately-held companies as well. We conjecture that potential
governance issues as well as benefits that stem from state ownership are likely to be amplified away
from the public gaze. For example, on one hand, corrupt politicians can more easily tunnel corporate
resources without the threat of market discipline.22 On the other hand, governments can more easily
orient SOEs toward achievement of long-term specific social objectives without being answerable to
the equity market on a frequent basis. Which way the pendulum swings on average remains an empirical
question.
2.2.4 Employee Ownership
Another widespread form of concentrated ownership is employee ownership — survey data
from National Center for Employee Ownership (NCEO) suggests that 36% of employees working for
21 Similarly, Wang, Wong, and Xia (2008) finds that Chinese SOEs controlled by local governments are more likely to hire
small local auditors, consistent with the local geographic incentives of these SOEs. 22 See Hope, Li, Liu, and Wu (2016) for an in-depth examination of how news related to tunneling problems is censored in
China.
26
U.S. companies (or about 28 million Americans) have equity ownership interest in their firms through
stock holdings or stock-option holdings. Employees can obtain equity ownership in their companies
through a variety of approaches, including the most common form of employee stock-ownership plans
(ESOPs), stock and profit-sharing bonus plans, and other broadly-granted stock-option and equity
awards. The NCEO estimates total assets held by ESOP and ESOP-like plans in the U.S. to be
approximately $1.3 trillion. NCEO data suggest that an overwhelming 92% of ESOP and ESOP-like
plans pertain to privately-held companies. Managerial excesses during the financial crisis have
rekindled regulatory and academic interest in non-traditional forms of governance and monitoring.
Insofar as employee ownership aligns long-term interests of the employees with their firms, employee
ownership seems to be an ideal candidate for research and policy interest along these lines.
Significant research attention has been devoted to the effect of employee ownership on firm
performance (Bova, Dou, and Hope 2014).23 In contrast, limited research has been conducted on the
impact of rank-and-file employee and financial-reporting outcomes. For example, Bova, Dou, and Hope
(2014) test the “incentive alignment” vs. “rent extraction” hypotheses for U.S. public firms. They find
that voluntary disclosure is positively related to employees’ equity ownership, and that this effect
increases with employees’ negotiation power within the firm. Jiraporn (2007) also studies U.S. listed
companies and reports a negative association between the extent of employee ownership and earnings
management, suggesting that ownership incentivizes employees to monitor better. In other words, in
23 Proponents of employee ownership argue that better incentive alignment drives higher corporate performance (Jones and
Kato 1995, Kruse, Blasi, and Park 2009). Blasi, Kruse, and Weltman (2013) report results from a dataset pertaining to
privately-held companies that adopted ESOP plans between 1988 and 1994, and document greater sales and employment
growth, higher sales/productivity, and higher survival rates for ESOP firms. Quarrey and Rosen (1987) also document higher
sales and employment growth among privately-held ESOP firms in the U.S., whereas GAO (1987) reports higher
productivity growth among ESOP firms, and that the benefits were more pronounced for ESOP firms that had worker
participation plans (see also Winther and Marens (1997. Numerous studies using samples of U.S. publicly-listed companies
have reported an on-average positive association between employee ownership and various measures of firm performance
(Chang and Mayers 1992, Park and Song 1995, and Beatty, 1995, among others) — see Rosen (2011) for a comprehensive
review. Empirical evidence also suggests that employee ownership is negatively related to firm risk (Bova, Kolev, Thomas,
and Zhang 2014), and reduces frictions during labor disputes and contract renegotiations (Cramton, Mehran, and Tracy
2008).
27
addition to the direct effect of employee ownership on performance improvement, there appears to be
an added indirect benefit by way of enhanced voluntary disclosures and lower earnings management.
Overall, despite the economic importance of employee ownership for privately-held firms,
evidence on the association between employee ownership and financial reporting, especially using non-
U.S. samples is rather sparse, and this is surprising given the importance of employee ownership in
many jurisdictions. We believe that this is an area ripe for empirical investigation. For example, given
the prevalence of other firms of concentrated ownership within private firms (e.g., family and
government ownership), does employee ownership make a significant difference to any financial-
reporting outcomes for private firms? Further, does the effect of employee ownership vary with the
legal and institutional environment (e.g., more vs. less employee-friendly environments)?
2.2.4. Private-equity (PE) and venture-capital (VC) financing
Privately-held firms, by definition, raise their equity financing from private sources. In this
section, we analyze the agency issues and resultant incentives inherent in early-stage private-equity
financing (PE) to companies with high-growth potential – generally referred to as VC funding. VCs
typically invest in startups, but funding can be provided to companies at various stages of development.
Annual funding provided to VC-backed companies globally has sharply increased over the last few
years, increasing from $45.2 billion in 2012 to $130.9 billion in 2015 (KPMG Venture Pulse Report,
Q2 2016).
PE-investments in general, and VC-investments in particular, are characterized by a high degree
of information asymmetry that is inherent in young and high-growth potential firms. As Cochrane
(2001) points out, VC-investments are often not purely financial, as VC-firms provide valuable
advisory and support services to investees. In other words, VC-firms are active financial intermediaries
that serve not only a monitoring function, but also actively support and mentor firm management by
providing advisory services (Kaplan and Strömberg 2001; Bander, Antweiler, and Amit 2002; Bottazzi,
28
Rin and Hellman 2004), as opposed to bank-debt investors who are mostly concerned about downside
risk and actively monitor firm compliance with specific covenants and provisions that protect them
from such downside risk. The economics and entrepreneurial-finance literature has documented that
this active monitoring and support provided by PE-investors results in substantial changes to firms’
corporate-governance systems and affects the professional management and performance of the
portfolio firms (Sahlman 1990; Lerner 1995; Sapienza, Manigart, and Vermier1996; Hellman and Puri
2002; Cowling 2003; Kaplan and Strömberg 2004). Consistent with this argument, Gompers and Lerner
(1999) report that PE-investments lead to a positive certifying effect on portfolio companies over and
above the mere alleviation of financing constraints.
Evidence on PE-investments and FRQ
A limited but conclusive set of papers appeal to this positive governance role of PE-firms and
examine the relation between investments by PE-investors and the financial reporting practices of
portfolio firms. Beuselinck, Deloof, and Manigart (2004) examine a hand-collected dataset comprising
of Belgian private firms that received PE funding and report that these firms manage their earnings
upwards to attract PE-investor interest before the investment. An interesting cross-sectional finding in
this study is that private (non-governmental) PE investors serve a more rigorous governance function
compared to PE-investments by the government. Katz (2006) reports supportive evidence using a
sample of U.S. firms that have publicly-listed debt but unlisted equity — such quasi-private firms that
are sponsored by PE-firms exhibit higher FRQ compared to non-PE backed firms.
Davilla and Foster (2005) examine evidence from the field pertaining to 78 U.S. startup firms,
including a high percentage of VC-backed firms, and report a positive association between VC funding
and the prevalence of professional management and financial planning and evaluation systems. The
article further reports positive effects of management-control systems adoption on valuation by VC-
firms, suggesting indirectly the value of management and financial reporting systems to VC-investors.
29
Using a sample of 67 portfolio investments of 11 VC firms, Kaplan and Strömberg (2004) also report
that VC-investors are frequently involved in actions such as implementation of information and
accounting control systems. Hand (2005) reports complementary evidence concerning the relevance of
financial statement information to VC-investors by documenting the value relevance of financial
statements to VC-investors in 204 U.S. biotechnology firms. Further, Hand (2005) reports that the
relevance of financial statement information increases as the portfolio firms mature. Employing a
sample of 502 VC-backed firms that conducted an IPO in the U.S. from 1996 to 2000, Armstrong,
Davila, and Foster (2006) report similar findings concerning relevance of financial statement
information to the valuation of VC-backed firms, and that costs such as R&D expense that have an
investment aspect are positively associated with valuation of VC-backed firms. While this evidence
does not directly study the quality of reported financial numbers, it indirectly suggests that VC-investors
value financial statement information and are accordingly likely to demand high-quality reports.
Using a sample of 270 unquoted Belgian PE-backed firms during 1985-1999, Beuselinck and
Manigart (2007) report a counterintuitive finding that portfolio firms with higher PE-investor stakes
exhibit lower FRQ. The authors attribute this finding to the fact that PE investors with greater stakes
can monitor the firm more rigorously through private communication, without necessarily requiring
public financial statements. In other words, this study suggests that FRQ and PE equity percentage
stakes are substitute corporate-governance mechanisms.
A related stream of literature has examined a specific setting where incentives to manage
earnings are likely to be salient — the time of the VC-investors’ exit via IPOs of portfolio firms.
Suggesting that VCs play a positive corporate-governance role, Morsfield and Tan (2006) and
Hochberg (2008) find that U.S. VC-backed firms record lower abnormal accruals during the fiscal year
in which the IPO takes place, compared to non VC-backed firms. Liu (2014) also used a sample of U.S.
IPOs and finds a similar restraining effect on real-earnings management for VC-backed firms, but notes
30
that this governance effect was diluted during the internet bubble. Wongsunwai (2013) shows that
earnings management for U.S. IPO firms (both real and accruals-based) during the IPO year is lower
for firms that that are backed by higher-quality VCs. Gotkan and Muslu (2015) report findings that are
similar in tenor for IPOs of U.S. firms backed by listed PE firms — IPOs of firms backed by listed PE-
firms report lower discretionary accruals and more conservative earnings, consistent with a positive
spillover effect for listed PE-firms’ investees. Lee and Masulis (2011) report similar findings — IPO
firms backed by more reputable VCs exhibit lower earnings management, and that this effect is
amplified for IPOs that are underwritten by more reputed investment banks.
We believe that the literature on financial reporting by VC-backed funds, while burgeoning, still
needs to further our understanding of what exactly do VC-investors mean by high quality financial
reporting (assuming that they care about financial reporting to begin with). Another interesting avenue
for research would be to examine the efficiency of VC investment decisions — is the relative weighting
of financial and non-financial information by VC-investors reflected in ex-post investment
performance?
Government-backed venture capital
Government-backed equity investment programs (also referred to as “hybrid funds” when the
government is a co-investor) generally arise due to supply-side problems in the market for venture
capital.24 The rationale for government intervention has been argued to be particularly strong for young
firms with a high degree of information asymmetry and with projects that generate positive social
benefits (Evans and Jovanovic 1989). However, observers such as Berger and Udell (2006) note that
state-owned financing institutions generally suffer from weaker monitoring incentives compared to
24 The public-policy argument in favor of venture capital suggests that investments in SMEs exhibit a greater likelihood of
spurring innovation in the economy compared to similar-sized investments by large corporates (e.g., Kortum and Lerner
2000). If growth in the SME sector and concomitant economic benefits are a public-policy objective, then it seems natural
that government intervention in the venture/growth capital markets has been suggested as a way to increase supply of capital
to SMEs.
31
private financiers, and accordingly give rise to inefficient investments. Inefficiencies can creep up due
to the myriad policy objectives that government-backed funds might have — such as a regional focus
(e.g., Reid and Nightingale 2011; Mason and Pierrakis 2009) or schemes that are designed for the
creation of employment during economic downturns rather than pursuit of growth. It is perhaps because
of these inefficiencies, or perhaps due to an unobserved selection problem, that businesses that are
backed by government-backed capital tend to underperform those backed by private capital (e.g.,
Brander, Eagan, and Hellman 2010 in the Canadian context, and Murray 1998 in Europe).25
The impact on firm performance and achievement of objectives notwithstanding, government-
backed venture capital appears to be an important feature of these markets throughout the world. What
role, if any, does financial reporting play in this form of financing? It is not clear as there are no extant
empirical studies with the exception of Beuselinck, Deloof, and Manigart (2004). They examine
Belgian private firms that received PE funding and show that firms backed by government-backed PE
firms exhibit lower earnings conservatism, consistent with more slack monitoring by government-
backed PE firms. The effect of financial reporting in attracting government interest is an area ripe for
investigation — it is likely that investees that modify their business pitch to make a case for achievement
of social-policy objectives would be more likely to succeed in attracting government funding. Further,
while Beuselinck, Deloof, and Manigart (2004) report lower conservatism, future studies can study
whether other elements of investees’ financial reporting and performance improve due to the potentially
long-term horizon of governments (e.g., is there a lower need for real-earnings management?).
25 However, empirical evidence remains mixed — Lerner, Pierrakis, Collins, and Biosca (2011) report on the
underperformance by public-backed funds both in the U.K. and the U.S., and by NAO (2009) for U.K.-based public funds.
Grilli and Murtinu (2012) do not find such disparities in a multi-country European context, and Collaewaert and Aernoudt
(2008) report inconclusive evidence from Belgium. It is possible, however, that while government intervention may appear
inefficient in the short-run, it may lead to desirable systemic consequences in the long-run by fostering growth and leading
to self-sufficiency once funding is withdrawn (Avnimelech and Teubal 2002).
32
2.3. Trade Credit
2.3.1. Supplier credit: Background
Research attention on private-firm financing has primarily been focused on debt and equity
financing, which is unsurprising given data-availability reasons. One source of financing that is often
overlooked in research studies despite its extensive prevalence and magnitude is supplier credit (also
referred to as trade credit). Simply put, supplier credit is short-term purchase financing provided by a
firm’s suppliers — the supplier delivers goods and simultaneously grants credit to the customer. The
importance of supplier credit in terms of magnitude, however, has been well documented — for large
listed companies of G-7 countries, Rajan and Zingales (1995) report that 11.5 to 17% of total assets are
financed by supplier credit. Giannetti (2003) reports slightly higher ratios for privately held European
firms. Casciano, Clatworthy, Osma, Gassen, Imam, and Jeanjean (2013) report consistent evidence by
citing a 2006 survey of European businesses that revealed that a majority of surveyed firms sell over
three quarters of their goods and services on credit. Beck, Demirgüç-Kunt, and Maksimovic (2008)
provide survey evidence pertaining to 48 countries that supplier credit was used to finance
approximately 20% of all externally-financed investments. As Wilson and Summers (2002) suggest,
supplier credit can be especially important for small and fast-growing private firms that have limited
access to other sources of external financing (see also Berger and Udell 1998; Cuñat 2007). Extension
of trade credit to start-ups enables the buyer firm to establish a credit history of repayment, which
facilitates access to bank finance in a later stage (Cook 1999; Garcia-Appendini 2007).
While supplier credit is akin to short-term debt, Cuñat and Garcia-Appendini (2012) argue that
there are three major differences. First, unlike bank loans, supplier credit is effectively short-term
lending of goods and services (i.e., it is “in kind” rather than cash). Second, trade credit is characterized
33
by bilateral or industry conventions and is typically not accompanied by formal contracts. Finally, the
suppliers are not financial institutions and accordingly financing is not their primary business activity.26
Supplier credit and FRQ
Although theoretical studies have modeled supplier credit as a mechanism to reduce information
asymmetry between suppliers and customers (e.g., Smith 1987), the theoretical relation between
supplier credit and FRQ has not yet been explicitly modeled (e.g., whether they are substitutes or
complements.) A few survey-based and empirical studies, however, have addressed this question.
Collis, Jarvis, and Page (2013) interview management at small to mid-sized private firms in Finland,
the United States, the United Kingdom, and South Africa. They find that suppliers rarely use financial
statements when offering credit to customers, but instead they often rely on the payment-default reports,
the age of the customer, their prior relationship with the customer, and their knowledge learned in their
prior dealings with the customer. In contrast, Garcia-Teruel, Martinez-Solano, and Sanchez-Ballesta
(2014) examine a dataset of Spanish SMEs and find that firms with higher accruals quality have greater
access to trade credit, suggesting that suppliers have informational needs that are similar to other capital
providers. Similarly, Hope, Thomas, and Vyas (2016) study private firms in the U.S. and report
evidence consistent with suppliers’ demanding high quality financial statements from their privately-
held customers. They appeal to the argument in MacLeod (2007) that firms use accounting quality to
26 Various theoretical reasons have been put forward to explain the existence of supplier credit. The financing motive
suggests that supplier credit enables suppliers and customers to circumvent credit-market imperfections (Ferris 1981,
Schwartz 1974), the tax motive explains supplier credit as a function of the difference in the distribution of marginal tax
rates between buyers and sellers (Brick and Fung 1984), whereas the pricing motive suggests that supplier credit is
essentially a selling expense that is used to increase the product demand (Nadiri 1969), and to circumvent regulatory
prohibitions on price discrimination (Meltzer 1960; Schwartz and Whitcomb 1980; Brenan, Maksimovic, and Zechner
1988). Information asymmetry in the product markets is offered as one reason why trade credit exists. For example, Lee and
Stowe (1993) and Long, Malitz, and Ravid (1993) suggest that trade credit acts as a warranty on product quality. Smith
(1987) and Biais and Gollier (1997) suggest that supplier credit emerges as an alternative to bank lending as suppliers have
an informational advantage over banks. A number of other empirical studies examine firm characteristics, product
characteristics, and bank-firm relationships as determinants of supplier credit and its terms to support the above theoretical
arguments (e.g., Mian and Smith 1992; Petersen and Rajan 1997; Cheng and Pike 2003; Pike, Cheng, Cravens, and
Lamminmaki 2005; Giannetti, Burkart, and Ellingsen 2008; Kim 2016; Huyghebaert 2006; Deloof and Jegers 1999; Deloof
and Jegers 1996; Danielson and Scott 2004; Cunat 2007).
34
maintain long-term relationships with their suppliers and to continue receiving a “reputational
premium” (through preferred price and/or other trading terms).
We would like to highlight a few studies that are conducted using publicly-listed company data,
but the findings may apply to privately-held companies as well. Costello (2013) examines long-term
supply contracts gleaned from SEC filings of publicly-listed firms and finds that specific investments,
information asymmetry, and FRQ affect the customer-supplier contract design. Specifically,
information asymmetry, proxied by the distance between the supplier and the customer, is associated
with a shorter contract duration and greater covenant usage, and low FRQ is associated with the lower
covenant usage. Radhakrishnan, Wang, and Zhang (2014) also rely on SEC filings to infer major
customer-supplier relationships, and find that suppliers’ profitability is positively associated with
customers’ capital-market information quality, as measured by customers’ provision of earnings
forecasts, reported earnings quality, and coverage by analysts and credit-rating agencies. Dou, Hope,
and Thomas (2013) conduct their empirical analyses on a sample of publicly-listed companies from 39
countries and show that firms in industries with greater relationship-specific investments resort to
greater income smoothing, presumably to maintain and enjoy the benefits of their trade relationships.27
In terms of future research, supplier credit provides fertile ground for testing theories pertaining
to the effects of information asymmetry on capital providers. First, after controlling for information
asymmetry, can we infer the degree of information asymmetry based on reliance on supplier credit
compared to other financing sources such as bank loans? Second, with the exception of Costello (2013),
the literature has largely ignored the terms of supplier credit. We admit significant data constraints exist
in obtaining supply contracts pertaining to private firms; accordingly, this question is amenable to
survey-based or field studies.
27 A natural conjecture is that suppliers are more likely to rely on financial statements of their customers the more readily
available such information is. For example, in the Nordic countries all firms’ financial are easily available and customers’
“payment remarks” can also be accessed easily (Che, Hope, and Langli 2016).
35
2.3.2 Factoring
Alleviation of information asymmetry between lenders and borrowers, especially for small and
opaque borrowers without an established financial track record, often leads to demand for asset-based
financing. A specialized form of asset-based funding is factoring — whereby accounts receivables of a
firm are sold by a client firm to a bank or a specialized factoring firm, with the title to the receivables
often passing on to the lender. The size of the global factoring market totaled $2,594 billion in 2015
(Factors Chain International). Auboin, Smythe, and Teh (2016) note that the rapid growth in factoring
is attributable in part to the general retrenchment of banks from SME lending during the financial crisis.
However, Bakker, Klapper, and Udell (2004) suggest that the importance of factoring as a percentage
of GDP varies widely across countries (e.g., factoring is much more widespread in Italy than in the U.S.
and Germany). Berger and Udell (2004) argue that factoring solves the severe information asymmetry
that is inherent in high-risk borrowers — lending underwriting is based not on the overall
creditworthiness of the firm, but on the quality of the accounts receivables (see also Klapper 2006).
Accordingly, the key credit-risk exposure that factors are concerned about is that of the obligor. Berger
and Udell (2004) also suggest that factoring may be useful for firm in countries with weak creditor
rights, and in instances where the receivables pertain to obligors from strong information environments.
Empirical evidence on the use of factoring is limited. Soufani (2002) employs interview-based
survey data from the U.K. to examine the determinants of the use of factoring and finds that factoring
can be particularly useful for SMEs. The study notes that while the factors frequently require financial
statements from borrowers, the credit-granting decision is not influenced by the strength of the financial
statements. The author notes that weak financial positions are a defining characteristic of many small
36
firms, and accordingly, as normal financial statement- based bank lending is often not accessible to
them, factoring can be useful in alleviating financing constraints.28
Overall, while there is no explicit evidence on the interaction between financial reporting and
the use or terms of factoring, we predict that there is scope for research examination along the following
lines: (a) is the factor’s assessment of the creditworthiness of the accounts receivables impacted by
obligors’ financial reporting (i.e., does the account obligor’s financial reporting transparency impact
deal terms for the seller?), and (b) while not direct, is there a secondary role for sellers’ FRQ, especially
when the factoring is done with recourse?
2.4. Crowdfunding
Crowdfunding (or crowdsourcing) has recently emerged as an alternative source of external
financing for entrepreneurs to help entrepreneurs fund early-stage projects. Similar to other forms of
alternative financing, due to a general retrenchment in traditional bank credit since the financial crisis,
crowdfunding has become increasingly appealing to SMEs. In fact, crowdfunding is on track to
surpassing traditional venture capital in the foreseeable future — growing from $880 million in funding
in 2010 to over $34 billion in 2015 (Forbes 2015). In terms of relative importance, crowdfunding
constitutes more than 80% of the total out of the total European online alternative-finance market
28 Determinants that impact the factoring decision include borrower size, the quality and suitability of the underlying product
or service to the customers, industry, management quality, and importantly collectability of the accounts and the issuance
of credit notes by the borrowers to its customers. On the demand side, Smith and Schnuker (1994) model and demonstrate
that asset specificity is negatively related to the factoring decision, and that factoring is more likely to be used when
information and monitoring costs are high. Mian and Smith (1992) report similar evidence regarding the role of asset
specificity in determining the use of factoring in the U.S. Sopranzetti (1998) adds more nuance to the factoring decision by
developing and finding support for an equilibrium model that predicts the use of factoring without recourse for high-quality
receivables, recourse factoring for riskier accounts, and inability of borrowers with high bankruptcy risk to factor their
riskiest accounts. Summer and Wilson (2000) is another empirical study that uses data from surveys of U.K. credit managers
and finds that smaller firms are more likely to use factoring, and that asset specificity is negatively related to factoring.
Asselbergh (2002) reports evidence from Belgium that suggests the use of factoring by small companies that have high-
growth potential and investment needs. Carretta (2009) finds that while adoption of International Accounting Standards by
firms did not bring about a significant change in their factoring use, it brought about an improvement in their balance-sheet
ratios.
37
(Wardrop, Zhang, Rau, and Gray 2015). Unlike traditional bank financing or private-equity investing,
crowdfunding relies on an online peer-to-peer financing platform that matches a large audience of
online prospective investors to the entrepreneur, in which each investor only provides a small amount
of capital. The crowdfunding platforms vary in their investment rules, but crowdfunding can generally
be categorized into five types: lending-based, equity-based, hybrid-based, royalty-based, and donation-
based (or reward-based) crowdfunding.29
A primary concern with funding young and relatively unknown ventures is severe information
asymmetry between the investors and the investee (e.g., Hildebrand, Puri, and Rocholl 2016), and
accordingly, the need for ex-ante due diligence and ex-post monitoring is acute. However, unlike
traditional bank lending or VC-investing, dispersion (and the small size and potential lack of
sophistication of many retail crowdfunders) inhibits efficient monitoring. It is therefore not surprising
that the mechanisms used by investees to reduce information asymmetry have attracted regulatory and
academic attention. A number of studies examine the signaling mechanisms used by investees to reduce
the information asymmetry, including the use of voluntary disclosure.
Many studies examine crowdfunding in the context of personal loans provided on peer-to-peer
lending platforms such as prosper.com. Most of these loans are personal, although a significant
percentage can pertain to loans that have an explicit business reason. Crowdfund investors primarily
rely on hard facts (e.g., credit scores) to make investment decisions, but they do take the soft facts into
consideration, especially when borrowers’ credit ratings are poor (Iyer, Khwaja, Luttmer, and Shue
29 Several papers examine the motives of capital-providers (i.e., crowdfunders) and capital-seekers (i.e., investees).
Crowdfunders are generally heterogeneous in their motivations, and are motivated by social and other non-pecuniary
considerations in addition to the direct financial motive (Lin, Boh, and Goh 2014; Allison, Davis, Short, and Webb 2015).
Firms seek crowdfunding rather than other traditional financing for a number of reasons. First, because companies often
face financing gaps in their early startup stage, the access to a large online investor pool alleviates financial constraints
(Belleflamme, Lambert, and Schwienbacher 2013). Crowdfunding also allows young firms to attract public attention
(without the regulatory burdens associated with public listing), obtain feedback on their products and services, and form
relationships and networks (Belleflamme et al. 2013; Hui, Gerber, and Greenberg 2012). In addition, crowdfunding increases
visibility and product consumption (Burtch, Ghose, and Wattal 2013), facilitates access to customers, improves press
coverage, and attracts interest of potential employees and external funders (Mollick and Kuppuswamy 2014).
38
2009; Michels 2012). Crowdfunding investment decisions are positively associated with the past results
of similar projects, the actions of other crowdfunders, popularity rankings, blog posts, media coverage,
and features of the platform (Ward and Ramachandran 2010; Qiu 2013). In the mobile-application
industry, early-stage investments managed by “experts” are associated with increased funding
probability as experts are seen as a signal of credibility (Kim and Viswanathan 2014). Also, external
references, recommendations from friends and acquaintances, and social networks serve as positive
signals, and thus, increase funding probability (Mollick 2014; Liu, Brass, Lu, and Chen 2015; Moritz,
Block, and Lutz 2014; Everett 2015; Liu et al. 2015). In the context of equity crowdfunding, ventures
with more board members, higher levels of education, and better networks are positive signals to
investors, so they are more likely to be funded (Ahler, Cumming, Gunther, and Schweizer 2015).
Dorfleitner, Priberny, Schuster, Stoiber, Weber, Castro, and Kammler (2016) also find that soft
factors derived from the description texts are associated with funding probability and default probability
for two leading European peer-to-peer platforms. This is because the soft information helps
entrepreneurs establish trust with crowdfunders, and thus, they are associated with a higher likelihood
of successful financing, lower interest rates, and a decrease in the probability of loan defaults (Allison
et al. 2015; Duarte, Siegel, and Yong 2012; Gao and Lin 2014; Herzenstein, Dholakia, Andrews 2011;
Ravina 2012; Yang 2014; Feng, Fan, Yoon 2015). Maier (2014) finds that voluntary verification of
information is associated with lower cost of borrowing.
The studies cited above highlight that even in the absence of credible financial reporting
information, investors are able to base their funding decisions on alternative sources of information.
However, the potential for fraud in this market is omnipresent and the long-term viability of funding
based this type of bespoke information gathering remains to be seen. After all, the crowdfunding market
of today, especially on the equity side, bears resemblance to the pre-SEC era equity markets in the U.S.
— a systematic upsurge in fraud incidences or even widespread materialization of risk (e.g., failing of
39
ventures) could prompt calls for regulatory intervention. In terms of future research, we believe that the
crowdfunding setting is ideal for testing the usefulness of financial statement information compared to
alternative softer sources of information for nascent companies. On one hand, the mere act of financial
statement preparation could bring credibility to a venture. On the other hand, it is precisely for these
types of early ventures that investors have a need for timely and forward-looking information that
traditional financial statements cannot provide.
3. Conclusions
In this article we discuss a large literature pertaining to private-company financing sources, with an
objective of understanding the drivers of financial reporting by private firms. We consider debt
financing (including bank financing, leasing, and government guarantees), equity financing (family
ownership, government ownership, private-equity financing, employee ownership), and trade credit
(including supplier credit and factoring). We document significant contextual heterogeneity in private
companies’ financing sources. We further find or predict that the financing structure is one of the
primary drivers of financial reporting within private firms. Finally, some financing structures such as
concentrated equity (family, government, and employee ownership), direct or indirect lending by
governments, and crowdfunding, give rise to interesting social, regulatory, and policy questions that
interact with financial reporting beyond what one might predict using standard agency-theoretic
considerations.
We believe that future research can shed light on several interesting questions posed by us
throughout the article:
We suggest that investigation is warranted into what forms of FRQ are particularly relevant
for private firms. We further recommend research on whether accounting constitutes a
higher percentage of the overall information set for private firms (relative to public firms).
40
Finally, there is scant evidence on disclosure (i.e., issues other than measurement and
recognition) on private firms.
Prior literature has largely been focused on whether financial reporting is useful for
contracting purposes. However, what constitutes high quality financial reporting in the eyes
of external capital providers such as bankers and PE investors remains unclear and could
be an interesting avenue for future research. Similarly, future research could shed light on
how financial vs. non-financial reporting information is weighted by these external capital
providers. In terms of outcome variables, while there is evidence on the link between FRQ
and loan interest rates, future research could shed light on how various other contractual
terms such as covenants, personal guarantees, and collateral vary with FRQ and relative to
each other.
Despite widespread prevalence of government credit-guarantee schemes around the world,
research on that topic in accounting is virtually non-existent. We have highlighted several
avenues for research, including whether there is any dilution in private bank monitoring due
to existence of state guarantees, and whether FRQ could mitigate such dilution, if any.
With regards to the lease vs. buy decision, we propose that researchers extend the work by
Beatty et al. (2010) in the private-firm setting. Further, similar to bank loans, a case could
be made for an examination of lease terms over and above the cost of financing/leasing.
Finally, researchers could study whether lessors’ views of borrowers’ FRQ is similar to that
of bank lenders.
Government ownership of banks persists despite widely documented inefficiencies — is
there any role for traditional notions of borrowers’ FRQ for obtaining government funding,
or is funding based primarily on achievement of social-policy objectives?
The literature on family, state, and employee ownership of equity remains rather limited for
41
private firms. This may be due to data-availability reasons. Accordingly, this is an area that
is ripe for survey or field-based research. We conjecture that potential governance
problems, as well as benefits, that accrue on account of such concentrated equity ownership
are likely to be amplified for private firms that are not subject to frequent public scrutiny.
Literature is similarly sparse on the use of supplier credit and factoring by private firms. In
addition to being of descriptive interest, such research could examine whether the extent of
reliance on supplier credit can inform us about the relative degree of information asymmetry
and market power of the firms. We were also unable to glean from the literature whether
factors consider the FRQ (of either the obligors or the borrower) in setting the contract
terms.
Finally, we acknowledge the potentially limited role of financial statements for nascent
ventures such as those that are funded by crowdfunding. However, this represents an
excellent research opportunity in terms of trying to understand the informational needs of
crowdfunding agents.
42
References
Ahlers, G.K.C., Cumming, D.J., Guenther, C. and D. Schweizer, D. 2015. Signaling in Equity Crowdfunding.
Entrepreneurship Theory and Practice 39(4): 955–980
Ali, A., Chen, T.Y., and S. Radhakrishnan. 2007. Corporate disclosures by family firms. Journal of Accounting
and Economics 44: 238–286.
Allison, T. H., Davis, B. C., Short, J. C., & J. W. Webb. 2015. Crowdfunding in a prosocial microlending
environment: Examining the role of intrinsic versus extrinsic cues. Entrepreneurship Theory and
Practice 39(1): 53-73.
Aghion, P., and P. Bolton. 1992. An incomplete contracts approach to financial contracting. Review of Economic
Studies 59: 473–94.
Akguc, S., Choi, J. and S. Kim. 2015. Do Private Firms Perform Better than Public Firms? 10th Annual
Conference on Asia-Pacific Financial Markets CAFM of the Korean Securities Association KSA, Seoul,
South Korea.
Akamah, H., O.-K. Hope, and W.B. Thomas. 2016. Tax Havens and Disclosure Aggregation. Working paper,
University of Nebraska, University of Toronto, and University of Oklahoma.
Allee, K. D., and T. L. Yohn. 2009. The demand for financial statements in an unregulated environment: An
examination of the production and use of financial statements by privately held small businesses. The
Accounting Review 84 (1): 1–25.
Altamuro, J., Johnston, R., Pandit, S. and H. Zhang. 2014. Operating leases and credit assessment. Contemporary
Accounting Research 31(2): 551-580.
Anderson, R.C., Reeb, D.M., 2003. Founding-family ownership and firm performance: evidence from the S&P
500. Journal of Finance 58: 1301–1328.
Anderson, R.C., Reeb, D.M., 2004. Board composition: balancing family influence in S&P 500 firms.
Administrative Science Quarterly 49: 209–237.
Andrade, S.C., Henry, E. and D. Nanda. 2014. The Impact of Operating Leases and Purchase Obligations on
Credit Market Prices. Working paper, University of Miami.
Armstrong, C., A. Davila and G. Foster. 2006. Venture-backed Private Equity Valuation and Financial Statement
Information. Review of Accounting Studies 11: 119–154.
Arraiz, I., Meléndez, M., and R. Stucci. 2011. The Effect of Partial Credit Guarantees on Firm Performance: The
Case of the Colombian National Guarantee Fund. Office of Evaluation and Oversight (OVE) Working
Paper, No. 02/2012, InterAmerican Development Bank.
Aharony, J., C. W. J. Lee, and T. J. Wong. 2000. Financial packaging of IPO firms in China. Journal of
Accounting Research 38 (1): 103–26.
Arosa, B., T. Iturralde and A. Maseda. 2010. Ownership Structure and Firm Performance in Non-Listed Firms:
Evidence from Spain. Journal of Family Business Strategy 1(2): 88-96.
Asselbergh, A. 2002. Financing firms with restricted access to financial markets: the use of trade credit and
factoring in Belgium. The European Journal of Finance 8 (1): 83-112
Carretta, A. 2009. The demand for factoring knowledge, ways of use, evaluation of advantages and other views
of factoring by Italian companies. Working paper, SDA Bocconi School of Management.
Auboin, M. and Smythe, H. and R. Teh. 2016. Supply Chain Finance and SMEs: Evidence from International
Factoring Data. CESifo Working Paper Series No. 6039.
Avnimelech, G. and M. Teubal. 2002. Venture capital policy in Israel: A comparative analysis and lessons for
other countries. Working paper, Hebrew University of Jerusalem.
Ayadi, R. 2009. SME financing in Europe: measures to improve the rating culture under the new banking rules.
In: Financing SMEs in Europe. SUERF - the Money and Finance Forum. Vienna.
Ayayi, A. 2004. Public Policy and Venture Capital: The Canadian Labor-Sponsored Venture Capital Funds.
Journal of Small Business Management 42(3): 335-345.
Badertscher, B. and Givoly, D. and Katz, S. and H. Lee. 2015. Private Ownership and the Cost of Debt: Evidence
from the Bond Market. Columbia Business School Research Paper No. 15-11.
Bai, C., Liu, Q., Lu, J., Song, F. and Zhang, J., 2004. ‘Corporate governance and market valuation in China’,
Journal of Comparative Economics, 32:599– 616.
43
Bakker, M., Klapper, L. and G. Udell. 2004. The Role of Factoring in Commercial Finance and the Case of
Eastern Europe. World Bank Working Paper No. 3342.
Ball, R., and L. Shivakumar. 2005. Earnings quality in UK private firms: comparative loss recognition timeliness.
Journal of Accounting and Economics 39 (1): 83 – 128.
Barnett, C. 2015. Trends Show Crowdfunding to Surpass VC in 2016. Forbes.com June 9, 2015.
Bathala, C.T. and T. Mukherjee. A survey of leasing in small firms. The Journal of Small Business Finance
4(2/3): 113-127.
Beatty, A. 1995. The cash flow and informational effects of employee stock ownership plans. Journal of
Financial Economics 38: 211-240.
Beatty, A., and D. Harris. 1998. The effects of taxes, agency costs and information asymmetry on earnings
management: a comparison of public and private firms. Review of Accounting Studies 3: 299-326.
Beatty, A., B. Ke, and K. Petroni. 2002. Earnings management to avoid earnings declines across publicly and
privately held banks. The Accounting Review 77 (July): 547–570.
Beatty, A., Liao, S., & Weber, J. 2010. Financial reporting quality, private information, monitoring, and the
lease-versus-buy decision. The Accounting Review 85(4): 1215-1238.
Beck, T., Demirgüç-Kunt, A., and V. Maksimovic. 2008. Financing patterns around the world: Are small firms
different? Journal of Financial Economics 89: 467-487.
Belleflamme, P., Lambert, T., & A. Schwienbacher 2014. Crowdfunding: Tapping the right crowd. Journal of
Business Venturing 29(5): 585-609.
Berger, A. N., and G. F. Udell. 1998. The Economics of Small Business Finance: The Roles of Private Equity
and Debt Markets in the Financial Growth Cycle. Journal of Banking and Finance 22: 613-673.
Berger, A. N. and G. F. Udell. 2006. A More Complete Conceptual Framework for SME Finance. Journal of
Banking and Finance 30(11): 2945–2966.
Bertay, A., A. Demirgüç-Kunt, and H. Huizinga. 2012. Bank Ownership and Credit over the Business Cycle: Is
Lending by State Banks Less Procyclical? Policy Research Working Paper 6110, World Bank,
Washington, DC.
Berzins, J., Ø. Bøhren, and P. Rydland. 2008. Corporate finance and governance in firms with limited liability:
Basic characteristics. Research Report No 1, Centre for Corporate Governance Research, Norwegian
Business School.
Beuselinck, C., and S. Manigart. 2007. Financial Reporting Quality in Private Equity Backed Companies: The
Impact of Ownership Concentration. Small Business Economics 29: 261–274
Beuselinck C., M. Deloof and S. Manigart. 2004. Private Equity and Earnings Quality. Working Paper, Ghent
University.
Bharath, S., J. Sunder, and S. V. Sunder. 2008. Accrual quality and Debt Contracting. The Accounting Review
83: 1-28.
Biais, B. and C. Gollier. 1997. Trade credit and credit rationing. Review of Financial Studies 10: 903–937.
Bigus, J., N. Georgiu and P. Schorn. 2015. Legal form and earnings properties. European Accounting Review
25(3): 515-548.
Blackwell, D., T. Noland, and D. Winters. 1998. The Value of Auditor Assurance: Evidence from Loan Pricing.
Journal of Accounting Research 36: 57–70.
Blasi, J., D. Kruse, and D. Weltman. 2013. Firm Survival and Performance in Privately-Held ESOP Companies:
Sharing Ownership, Profits, and Decision-Making in the 21st Century. Advances in the Economic
Analysis of Participatory & Labor-Managed Firms 14: 109-124.
Boardman, A. and A. Vining. 1989. Ownership and Performance in Competitive Environments: A Comparison
of the Performance of Private, Mixed, and State-Owned Enterprises. Journal of Law and Economics 32:
1-33.
Boocock, G., and M. Shariff. 2005. Measuring the effectiveness of credit guarantee schemes: Evidence from
Malaysia. International Small Business Journal 23(4): 427-454.
Botazzi L., M. da Rin and T. Hellmann. 2004. Active Financial Intermediation: Evidence on the Role of
Organizational Specialization and Human Capital. Finance Working Paper 49/2004, European Corporate
Governance Institute.
44
Bova, F., Y. Dou, and O.-K. Hope. 2014. Employee Ownership and Firm Disclosure. Contemporary Accounting
Research 32 (2): 639-673.
Bova, F., K. Kolev, J. Thomas, and F. Zhang. 2014. Non-executive employee ownership and corporate risk-
taking. The Accounting Review 90(1): 115-145
Bowman, R. G. 1980. The debt equivalent of leases: an empirical investigation. The Accounting Review 55: 237–
53.
Brander, J., W. Antweiler and R. Amit. 2002. Venture Capital Syndication: Improved Venture Selection Versus
Value Added Hypothesis. Journal of Economics and Management Strategy 11(3): 423–452.
Brav, O. 2009. Access to Capital, Capital Structure, and the Funding of the Firm. Journal of Finance 64: 263-
308.
Brennan, M.J., V. Maksimovic and J. Zechner. 1988. Vendor Financing. The Journal of Finance 43(5): 1127–
1141.
Brick, I. and W. Fung. 1984. Taxes and the theory of trade debt. Journal of Finance 39 (4): 1169-1176
Burgstahler, D.C., L. Hail, and C. Leuz. 2006. The importance of reporting incentives: Earnings management in
European private and public firms. The Accounting Review 81 (5): 983-1016.
Burkart, M., Ellingsen, T., 2004. In-kind finance: A theory of trade credit. American Economic Review 94, 569-
590.
Burtch, G., A. Ghose, and S. Wattal. 2013. An Empirical Examination of the Antecedents and Consequences of
Investment Patterns in Crowd-Funded Markets Information Systems Research, 24(3): 499-519
Capalbo, F. Frino, A., Mollica, V. and R. Palumbo. 2014. Accrual-based earnings management in state owned
companies: Implications for transnational accounting regulation. Accounting, Auditing & Accountability
Journal 27(6): 026 - 1040
Carey, P., R. Simnett and G. Tanewski. 2000. Voluntary Demand for Internal and External Auditing by Family
Businesses. Auditing: A Journal of Practice & Theory 19: 37-51
Cascino, S., Clatworthy, M., Osma, B., Gassen, J., and S. Imam. 2014. Who Uses Financial Reports and for What
Purpose? Evidence from Capital Providers. Accounting in Europe 11 (2): 185-209.
Cascino, S., A. Pugliese, D. Mussolino and C. Sansone. 2010. The influence of family ownership on the quality
of accounting information. Family Business Review 23: 246-265.
Cassar, G., C, Ittner, and K. Cavalluzzo. 2015. Alternative information sources and information asymmetry
reduction: evidence from small business debt. Journal of Accounting and Economics 59: 242-263.
Chang, S., and D. Mayers. 1992. Managerial vote ownership and shareholder wealth. Journal of Financial
Economics 32: 103-131.
Che, L., O.-K. Hope, and J.C. Langli. 2016. Does the Big-4 Effect Exist when Reputation and Litigation Risks
are Low? Evidence from Audit-Partner – Auditee Pair Switches. Working paper, University College of
Southeast Norway, University of Toronto, and BI Norwegian Business School.
Che, L., and J.C. Langi. 2016. Governance structure and firm performance in private family firms. Forthcoming,
Journal of Business Finance & Accounting.
Chen, H., J. Z. Chen, G. J. Lobo, and Y. Wang (2011). Effects of audit quality on earnings management and cost
of equity capital: Evidence from china. Contemporary Accounting Research 28(3), 892–925.
Chen Y.M., and S.C. Gong. 2000. Ownership structure and corporate performance: some Chinese evidence,
Advances in Pacific Basin Financial Markets, 6, 177-193.
Chen, F., O.-K. Hope, Q. Li, and X. Wang. 2011 Financial Reporting Quality and Investment Efficiency of
Private Firms in Emerging Markets. The Accounting Review 86 (4): 1255-1288.
Chen, S., Chen, X., Q. Cheng. 2008. Do family firms provide more or less voluntary disclosure? Journal of
Accounting Research. 46: 499–536.
Cheng, A. Wang, J., and S. Wei. 2015. State Ownership and Earnings Management around Initial Public
Offerings: Evidence from China. Journal of International Accounting Research: Fall, Vol. 14, No. 2, pp.
89-116.
Cheng, S., and R. Pike. 2003. The trade credit decision: Evidence of UK firms. Management and Decision
Economics 24: 219-438
Cheng, Q. 2014. Family firm research – A review. China Journal of Accounting Research 7(3): 149–163
45
Chi, W., D. Dhaliwal, O. Li and T-H Lin. 2013. Voluntary reporting incentives and reporting quality: evidence
from a reporting regime change for private firms in Taiwan. Contemporary Accounting Research 30:
1462-1489.
Claessens, S., Fan, J.P.H., Lang, L.H.P. 2000. The separation of ownership and control in East Asian
corporations. Journal of Financial Economics. 58: 81–112.
Clatworthy, M. and M. Peel. 2013. The impact of voluntary audit and governance characteristics on accounting
errors in private companies. Journal of Accounting and Public Policy 32 (3): 1-25.
CNA Interpreta. 2011. Study on Accounting Requirements for SMEs: Final Report, Brussels: European
Commission, 2011.
Cochrane, J. 2001. The Risk and Return of Venture Capital. Journal of Financial Economics 75: 3–52
Cole, R. A., and J. D. Wolken. 1995. Financial Services Used by Small Businesses: Evidence from the 1993
National Survey of Small Business Finances. Federal Reserve Bulletin 81(7): 629.
Collewaert, S. Manigart, and R. Aernoudt. 2008. Assessment of Government Funding of Business Angel
Networks in Flanders. Regional Studies 44(1): 119-130.
Collis, J. 2008. Directors’ Views on Accounting and Auditing Requirements for SMEs. Department for Business
Enterprise and Regulatory Reform, London.
Collis, J., and R. Jarvis. 2002. Financial information and the management of small private companies. Journal
of Small Business and Enterprise Development 9: 100-110.
Collis, J., Jarvis, R., and M. Page. 2013. SMEs, financial reporting and trade credit: an international study. ACCA
research publication, 2013.
Conyon, M., and L. He. 2011. Executive Compensation and Corporate Governance in China. Journal of
Corporate Finance 17(4): 1158-1175
Cook, L. 1999. Trade credit and bank finance: Financing small businesses in Russia. Journal of Business
Venturing 14: 493-518.
Costello, A. 2014. Trade Credit Policy in Long-Term Supply Contracts. Working paper, MIT.
Cowan, K., Drexler, A. and A. Yañez. 2008. The effect of credit insurance on liquidity cons trains and default
rates: Evidence from a Government Intervention. Central Bank of Chile Working Paper No 524.
Cotten, B.D., Schneider, D.K. and M. G. McCarthy. 2013. Capitalisation of operating leases and credit ratings.
Journal of Applied Research in Accounting and Finance 7(1): 2-17
Cowling, M. 2003. Productivity and Corporate Governance in Smaller Firms. Small Business Economics 20:
335–344.
Cramton, P., H. Mehran, and J. Tracy. 2008. ESOP fables: The impact of employee stock ownership plans on
labor disputes. FRB of New York Staff Report. No. 347.
Cuñat, V. 2007. Trade Credit: Suppliers as Debt Collectors and Insurance Providers. The Review of Financial
Studies 20(2): 491-527
Cuñat, V., and E. Garcia-Appendini. 2012. Trade credit and its role in entrepreneurial finance”, in “Handbook
of Entrepreneurial Finance. Edited by Douglas Cumming, Oxford University Press, pp. 526-557
Danielson, M.G. and J.A. Scott. 2004. Bank Loan Availability and Trade Credit Demand. Financial Review 39:
579–600.
Davila, A. and G. Foster. 2005. Management Accounting Systems Adoption Decisions: Evidence and
Performance Implications from Early-Stage/Startup Companies. The Accounting Review 80(4): 1039–
1068
Dedman, E. and A. Kausar. 2012. The impact of voluntary audit on credit ratings: evidence from UK private
firms. Accounting and Business Research 42: 397-418.
De Laurentis, G. and J. Mattei. 2009. Lessors’ recovery risk management capability. Managerial Finance 35(10):
860-873.
Deloof, M.M., Jegers, M. 1996. Trade credit, product quality, and intra group trade: Some European evidence.
Financial Management 25: 33-43.
Deloof, M. and M. Jeger. 1999. Trade credit, corporate groups and the financing of Belgian firms Journal of
Business Finance and Accounting 26: 945-966.
Demsetz, H. 1983. The structure of ownership and the theory of the firm. Journal of Law and Economics 26:
375-390.
46
Dhaliwal, D., Lee, H.S., and M. Neamtiu. 2011. The Impact of Operating Leases on Firm Financial and Operating
Risk. Journal of Accounting, Auditing and Finance 26(2): 151-197.
Ding, Y., Zhang, H., and J. Zhang. 2007. Private vs State Ownership and Earnings Management: Evidence from
Chinese Listed Companies Corporate Governance: An International Review 15(2): 223-238.
Dorfleitner, G., Priberny, C., Schuster, S., Stoiber, J., Weber, M., de Castro, I., and J. Kammler. 2016.
Description-text related soft information in peer-to-peer lending–Evidence from two leading European
platforms. Journal of Banking & Finance 64:169-187
Dou, Y., O.-K. Hope, and W.B. Thomas. 2013. Relationship-Specificity, Contract Enforceability, and Income
Smoothing. The Accounting Review 88 (5): 1629-1656.
Drury, C., and M. Tayles. Issues Arising from Surveys of Management Accounting Practice. Management
Accounting Research 6 (1995): 267-280.
Duarte, J., S. Siegel, and L. Young. 2012. Trust and Credit: The Role of Appearance in Peer-to-Peer Lending.
Review of Financial Studies 25 (8): 2455-2484.
Eisfeldt, A. and A. Rampini. 2009. Leasing, Ability to Repossess and Debt Capacity. The Review of Financial
Studies 22: 1621-1657.
El-Gazzar, S.M. 1993. Stock Market Effects of the Closeness to Debt Covenant Restrictions Resulting from
Capitalization of Leases. The Accounting Review 68(2): 258- 272.
Ely, K.M. 1995. Operating Lease Accounting and the Market’s Assessment of Equity Risk. Journal of
Accounting and Research 33(2): 397-415.
The Economist. 2012. The Visible Hand. Special Report, January 31, 2012.
European Central Bank (ECB). 2012. Survey on the access to finance of SMEs in the Euro area. October 2011
to March 2012. http://www.ecb.int/stats/money/surveys/sme/html/index.en.html
Evans, D. S. and B. Jovanovic. 1989. An estimated model of entrepreneurial choice under liquidity constraints.
Journal of Political Economy 97: 808-827.
Everett, C. 2014. Origins and Development of Credit-Based Crowdfunding. Economics and Finance Review
3(8): 1–9.
Feng, Y., X. Fan, and Y. Yoon. 2015. Lending and Borrowers’ Strategies in Online Peer-to-Peer Lending Market:
An Empirical Analysis of PPDAI.COM. Journal of Electronic Commerce Research 16(3): 242-260.
Ferris, J.S. A Transactions Theory of Trade Credit Use. Quarterly Journal of Economic 96: 243–270.
Firth, M., Fung, P.M.Y. and O.M. Rui. 2006. Corporate performance and CEO compensation in China. Journal
of Corporate Finance 12: 693–714.
Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2005. The market pricing of accrual quality. Journal of
Accounting and Economics 39 (2): 295–327.
Garcia-Appendini, E. 2007. Trade credit and information spillovers. UPF thesis, September
Garcia‐Teruel, P. J., Martníez‐Solano, P., & Sánchez‐Ballesta, J. P. 2014. Supplier Financing and Earnings
Quality. Journal of Business Finance & Accounting 41(9-10): 1193-1211.
Gallardo, J. 1997. Leasing to support small businesses and microenterprises. In: The World Bank. Policy
Research Working Paper 1857.
Goncharov, I., and J. Zimmermann. 2006. Earnings management when incentives compete: the role of tax
accounting in Russia. Journal of International Accounting Research 5: 41-65.
Gassen, J., and R. Fülbier. 2015. Do creditors prefer smooth earnings? Evidence from European private firms.
Journal of International Accounting Research 14 (2): 151-180.
Giannetti, Mariassunta. 2003. Do Better Institutions Mitigate Agency Problems? Evidence from Corporate
Finance Choices. Journal of Financial and Quantitative Analysis 38 (1): 185-212
Giannetti, M., Burkart, M., and T. Ellingsen. 2008. What you sell is what you lend? Explaining trade credit
contracts. Review of Financial Studies.
Gompers, P. and J. Lerner. 1999. The venture capital cycle. Cambridge Massachusetts: The MIT Press.
Gotkan, S., and V. Muslu. 2015. Financial Reporting Quality at IPOs Backed by Listed Private Equity Firms.
Working paper, University of Houston.
Green, A. 2003. Credit Guarantee Schemes for Small Enterprises: An Effective Instrument to Promote Private
Sector-Led Growth? SME Technical Working Papers Series, Working Paper No 10, UNIDO, Vienna.
47
Grilli, L. and S. Murtinu. 2012. Government, Venture Capital and the Growth of European High- Tech Start-
Ups: A Firm-Level Panel Data Analysis. (May 25, 2012). Available at SSRN.
Gross, T., and S. Verani. 2013. Financing Constraints, Firm Dynamics, and International Trade. Working paper,
Carleton University and Federal Reserve Board.
Haugen, R., and L. W. Senbet. 1988. Bankruptcy and agency costs: Their significance to the theory of optimal
capital structure. Journal of Financial and Quantitative Analysis 23: 27–38.
Hand, J. 2005. The Value Relevance of Financial Statements in the Venture Capital Market. The Accounting
Review 80(2): 613–648.
Hart, O., and J. Moore. 1996. The Governance of Exchanges: Members’ Cooperatives versus Outside Ownership.
Oxford Review of Economic Policy 12(4): 53-69.
Hart, J., A. Shleifer, and R.W. Vishny. 1997. The Proper Scope of Government: Theory and an Application to
Prisons. Quarterly Journal of Economics 112(4): 1126-61.
Hellmann, T. and M. Puri. 2002. Venture Capital and the Professionalization of Start-Up Firms: Empirical
Evidence. Journal of Finance 57: 169–197.
Herzenstein, M., Andrews, R.L., Dholakia, U., Lyandres, E. 2008. The Democratization of Personal Consumer
Loans? Determinants of Success in Online Peer-to-peer Lending Communities.
Hess, K., Gunasekarage, A., & Hovey, M. 2010. State-dominant and non-state-dominant ownership
concentration and firm performance: Evidence from China. International Journal of Managerial Finance,
6(4), 264-289.
Hildebrand, T., Puri, M., and J. Rocholl. 2016. Adverse incentives in crowdfunding. Forthcoming, Management
Science.
Hochberg, Y.V. 2012. Venture capital and corporate governance in the newly public firm. Review of Finance 16,
429-480.
Hope, O.-K. 2013. Large Shareholders and Accounting Research. China Journal of Accounting Research 6
(1):13-20.
Hope, O.-K. 2015. Discussion of “Do Creditors Prefer Smooth Earnings? Evidence from European Private
Firms.” Journal of International Accounting Research 14 (2): 181-184.
Hope, O.-K., and J.C. Langli. 2010. Auditor Independence in a Private Firm and Low Litigation Setting. The
Accounting Review 85 (2).
Hope, O.-K., J.C. Langli, and W.B. Thomas. 2012. Agency Conflicts and Auditing in Private Firms. Accounting,
Organizations, and Society 37 (7): 500-517.
Hope, O.-K., Y. Li, Q. Liu, and H. Wu. 2016. Protecting the Giant Pandas: China’s Censorship of Negative
News. Working paper, University of Toronto, Wuhan, Huazhong, and HEC Paris.
Hope, O-K., M. Ma, and W.B. Thomas. 2013. Tax avoidance and geographic earnings disclosures. Journal of
Accounting and Economics 56: 170-189.
Hope, O.-K., W.B. Thomas, and D. Vyas. 2011. Financial Credibility, Ownership, and Financing Constraints in
Private Firms. Journal of International Business Studies 42: 935-957.
Hope, O.-K., W.B. Thomas, and D. Vyas. 2013. Financial Reporting Quality in U.S. Private and Public Firms.
The Accounting Review 88 (5): 1715–1742.
Hope, O.-K., H. Yue, and Q. Zhong. 2016. Do Politically Connected Directors Affect Accounting Quality? Evidence from
China’s Anti-Corruption Campaign (Rule 18). Working paper, University of Toronto, Singapore Management
University, and Peking University.
Howorth, C., and A. Moro. 2012. Trustworthiness and interest rates: an empirical study of Italian SMEs. Small
Business Economics 39: 161-177.
Huyghebaert, N. 2006. On the Determinants and Dynamics of Trade Credit Use: Empirical Evidence from
Business Start-ups. Journal of Business Finance and Accounting 33(1-2): 305-328.
Iyer, R., Khwaja, A.I., Luttmer, E.F., and K. Shue, K. 2016. Screening peers softly: Inferring the quality of small
borrowers. Management Science 62(6): 554-1577
Jensen, M.C., and W. H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership
structure. Journal of Financial Economics 3 (4): 305–360.
Jiraporn, P. 2007. Employee ownership and earnings management: An empirical note. Applied Financial
Economics Letters 3(5): 287-293.
48
Jiraporn, P. and P. Dadlt. 2009. Does founding family control affect earnings management? An empirical note.
Applied Economics Letters 16(2): 113-119.
Jones, D.C., and T. Kato. 1995. The productivity effects of employee stock-ownership plans and bonuses:
evidence from Japanese panel data. American Economic Review 85 (3): 391-414.
Indjejikian, R., and M. Matejka. 2009. CFO Fiduciary Responsibilities and Annual Bonus Incentives. Journal of
Accounting Research 47: 1061-1093.
Kaplan, S. and P. Stromberg. 2001. Venture Capitalists as Principals: Contracting, Screening and Monitoring.
American Economic Review 91(2): 426–431.
Kaplan S. and P. Stromberg. 2004. Financial contracting meets the real world: An empirical analysis of venture
capital contracts. Review of Economic Studies 1–35.
Karjalainen, J., 2011. Audit quality and cost of debt capital for private firms: evidence from Finland.
International Journal of Auditing 15: 88-108.
Kato, T. and Long, C., 2006. CEO turnover, firm performance, and enterprise reform in China: evidence from
micro data. Journal of Comparative Economics 34: 796–817.
Katz S. 2006. Earnings management and conservatism in the transition between private and public ownership:
the role of private equity sponsors. Working Paper, Columbia University.
Kausar, A. and Shroff, N. and White, H. 2016. Real Effects of the Audit Choice. Journal of Accounting and
Economics 62: 157-181.
Kim, W. 2016. Determinants of Corporate Trade Credit: An Empirical Study on Korean Firms. International
Journal of Economics and Financial Issues 6(2): 414-419.
Kim, K., and S. Viswanathan, S. 2016. The ‘experts’ in the crowd: The role of ‘expert’ investors in a
crowdfunding market. Paper presented at the TPRC 41: The 41st Research Conference on
Communication, Information and Internet Policy.
Kitching, J., E. Kašperová and J. Collis. 2015. The contradictory consequences of regulation: the influence of
filing abbreviated accounts on UK small company performance. International Small Business Journal
33(7): 671-688.
Klapper L. 2006. The role of factoring for financing small and medium enterprises. Journal of Banking &
Finance 30/11: 3111-3130
Koren, J., Kosi, U., and A. Valentincic. 2014. Does financial statement audit reduce the cost of debt of private
firms? Working paper.
Kortum, S. and J. Lerner. 2000. Assessing the contribution of venture capital to innovation. RAND Journal of
Economics 31(4): 674-692.
Kruse, P., J. Blasi, and, and R. Park. 2009. Chapter 1: Shared Capitalism in the US Economy: Prevalence,
Characteristics, and Employee Views of Financial Participation in Enterprises. Shared Capitalism at
Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options University of
Chicago Press.
KPMG Management Consulting. 1999. An Evaluation of the Small Firms Loan Guarantee Scheme. Department
of Trade and Industry, London.
KPMG. 2016. Venture Pulse Report — Global analysis of fintech venture funding, Q2 2016.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A, and Vishny, R. 2002. Government Ownership of Banks. Journal
of Finance 57(1): 265–301.
Lasfer, A. and Levis, M. 1998. The determinants of the leasing decision of small and large companies. Working
paper, City University.
Lee, J. 2006. Impact of family relationships on attitudes of the second generation in family business. Family
Business Review 19(3): 175-191.
Lee, G., R. Masulis. 2011. Do more reputable financial institutions reduce earnings management by IPO issuers?
Journal of Corporate Finance 17: 982-1000.
Lelarge, C., D. Sraer, and D. Thesmar. 2008. Entrepreneurship and Credit Constraints: Evidence from a French
Loan Guarantee Program. in Lerner, J and Schoar, A (eds), International Differences in
Entrepreneurship. Chicago: University of Chicago Press.
Lennox, C. 2005. Management Ownership and Audit Firm Size. Contemporary Accounting Research 22 (1):
205-27.
49
Lennox, C.S., and J.A. Pittman. 2011. Voluntary Audits versus Mandatory Audits. The Accounting Review 86
(5): 1655-1678.
Lerner, J. 1995. Venture capitalists and the oversight of private firms. Journal of Finance 50: 301-318.
Lerner, J., I. Pierrakis, L. Collins, and A.B. Biosca. 2011. Atlantic Drift: Venture capital performance in the UK
and the US. Research report.
Lisowsky, P. and M. Minnis. 2013. Financial Reporting Choices of US Private Firms: Large- Sample Analysis
of GAAP and Audit Use. Working Paper, University of Chicago.
Lin, Y., Boh, W. F., & Goh, K. H. 2014. How different are crowdfunders? examining archetypes of crowdfunders
and their choice of projects. Working paper, Nanyang Technological University
Liu, X. 2013. Venture Capitalists and Portfolio Companies’ Real Activities Manipulation. Review of Quantitative
Finance and Accounting 43(1)
Liu, D., Lu, Y. and D. Brass. 2014. Friendships in Online Peer-to-Peer Lending: Pipes, Prisms, and Social
Herding. SSRN Working Paper No. 2251155,
Long, M. S., I. B. Malitz, and S. A. Ravid. 1994. Trade Credit, Quality Guarantees, and Product Marketability.
Financial Management 22: 117-127.
Maury, B. 2006. Family ownership and firm performance: empirical evidence from Western European
corporations. Journal of Corporate Finance 12: 321–341.
Meltzer, A. H. 1960. Mercantile Credit, Monetary Policy, and Size of Firms. Review of Economics and Statistics
42: 429-437.
Mian, S., and C. W. Smith. 1992. Accounts Receivable Management Policy: Theory and Evidence. Journal of
Finance 47: 169-200.
Mason, C. and I. Pierrakis. 2009. Venture capital, the regions and public policy: the united kingdom since the
post-2000 technology crash Hunter Centre for Entrepreneurship,. W. P. 09-02.
McNichols, M. F., and S. R. Stubben. 2008. Does Earnings Management Affect Firms’ Investment Decisions?
The Accounting Review 83: 1571-1603.
Megginson, W.L., Nash, R.C. and M. Randernborgh 1994. The Financial and Operating Performance of Newly
Privatized Firms: An International Empirical Analysis. Journal of Finance 49 (2): 403-452.
Micco, A., and U. Panizza. 2006. Bank Ownership and Lending Behavior. Economics Letters 93: 248–54.
Michels, J. 2012. Do Unverifiable Disclosures Matter? Evidence from Peer-to-peer Lending. The Accounting
Review 87(4): 1385-1413.
Minnis, M. 2011. The value of financial statement verification in debt financing: Evidence from private U.S.
firms. Journal of Accounting Research 49 (2): 457-506.
Minnis, M., and A. Sutherland. 2015. Financial Statements as Monitoring Mechanisms: Evidence from Small
Commercial Loans. Working paper, University of Chicago Booth School of Business.
Mollick, E. (2014), “The Dynamics of Crowdfunding: An Exploratory Study”, Journal of Business Venturing,
Vol. 29 No. 1, pp. 1–16
Mollick, E., and V. Kuppuswamy. 2014. After the campaign: Outcomes of crowdfunding. Working paper,
University of North Carolina.
Morck, R., Shleifer, A., Vishny, R.W., 1988. Management ownership and market valuation: an empirical
analysis. Journal of Financial Economics 20, 293–315.
Moritz, A., Block, J.H. and E. Lutz. 2015. Investor Communication in Equity-Based Crowdfunding: A
Qualitative-Empirical Study. Qualitative Research in Financial Markets 7(3): 309–342.
Morsfield, S., and C. Tan. 2006. Do venture capitalists influence the decision to manage earnings in initial public
offerings? The Accounting Review 81: 1119-1150.
Murray, G. C. 1998. A Policy Response to Regional Disparities in the Supply of Risk Capital to New
Technology-based Firms in the European Union: The European Seed Capital Fund Scheme. Regional
Studies 32(5): 405-419.
Myers, S. C. 1977. Determinants of corporate borrowing. Journal of Financial Economics 5: 147–75.
Nadiri, M.I. 1969. The Determinants of trade credit in the US total manufacturing sector. Econometrica 37: 408-
423.
Nagar, V., K. Petroni, and D. Wolfenzon. 2011. Governance problems in close corporations. Journal of Financial
and Quantitative Analysis 46 (4): 943-966.
50
NAO. 2009. Venture capital support to small businesses. The Department for Business, Innovation and Skills.
Niskanen, J., Karjalainen, J. and J. Niskanen. 2010. The Role of Auditing in Small, Private Family Firms: Is It
About Quality or Credibility? Family Business Review 23: 230-245.
Niskanen, J. and M. Niskanen. 2004. Covenants and Small Business Lending: The Finnish Case. Small Business
Economics 23: 137.
Oh, I., J. D. Lee, A. Heshmati, and G. G. Choi. 2009. Evaluation of Credit Guarantee Policy using Propensity
Score Matching. Small Business Economics 33(3): 335-351.
Organization for Economic Cooperation and Development (OECD). 2006. The SME Financing Gap, Vol. 1,
Theory and Evidence. Paris: OECD Publishing.
Organization for Economic Cooperation and Development (OECD). 2009. The impact of the global crisis on
SMEs and Entrepreneurship financing and policy responses. Paris: OECD Publishing.
Oxford Economics. 2011. The use of leasing amongst European SMEs. A report prepared for Leaseurope.
November 2011.
Pacter, P. 2004. Financial reporting: SMEs-will the GAAP widen for SMEs? Accountancy 133: 118-119.
Park, S., and M. Song. 1995. Employee stock ownership plans, firm performance, and monitoring by outside
blockholders. Financial Management 24(4): 52-65.
Peek, E., R. Cuijpers and W. Buijink.2010. Creditors’ and shareholders’ reporting demands in public versus
private firms: evidence from Europe. Contemporary Accounting Research 27: 49-91.
Penno, M., and D.T. Simon. 1986. Accounting choices: Public versus private firms. Journal of Business Finance
& Accounting 13 (4): 561-570.
Petersen, M.A. and R.G. Rajan. 1997. Trade Credit: Theories and Evidence. Review of Financial Studies 10(3):
661–691.
Pike, R., Cheng, N. S., Cravens, K., and D. Lamminmaki. 2005. Trade credit terms: Asymmetric information
and price discrimination evidence from three continents. Journal of Business Finance and Accounting
32(5 and 6): pp.1197-1236.
Prencipe, A., Bar-Yosef, S. and H. Dekker. 2014. Accounting research in family firms: theoretical and empirical
challenges. European Accounting Review 23: 361-385.
Prencipe, A., S. Bar-Yosef, P. Mazzola and L. Pozza. 2011. Income smoothing in family firm-controlled
companies: Evidence from Italian listed companies. Corporate Governance: an International Review
19: 529-546.
Qi, D., W. Wu, and H. Zhang, H., 2000. ‘Shareholding structure and corporate performance of partially privatized
firms: evidence from listed Chinese companies’, Pacific-Basin Finance Journal, 8:587– 610.
Quarrey, M., and C. Rosen. 1993. Employee Ownership and Corporate Performance. Oakland, CA: National
Center for Employee Ownership.
Radhakrishnan, S., Wang, Z., and Y. Zhang. 2014. Customers’ Capital Market Information Quality and
Suppliers’ Performance. Production and Operations Management 23(10): 1690–1705
Rajan, R. and L. Zingales. 1995. What Do We Know about Capital Structure? Some Evidence from International
Data. Journal of Finance 50(5): 1421–1460.
Ravina, E. 2012. Love and Loans: The Effect of Beauty and Personal Characteristics in Credit Markets. Working
Paper, Columbia GSB.
Reid A. and P. Nightingale, Eds. 2011. The Role of Different Funding Models in Stimulating the Creation of
Innovative New Companies. What is the most appropriate model for Europe? A report to the European
Research Area Board. Study funded by the European Commission, Directorate-General Research.
Riding, A., J. Madill, and G. Haines Jr. 2007. Incrementality of SME Loan Guarantees. Small Business
Economics 29(1-2): 47-61.
Ro, B.T. 1978. The Disclosure of Capitalized Lease Information and Stock Prices. Journal of Accounting
Research 16(2): 315-340.
Roper, S. 2011. Credit Guarantee Schemes: a tool to promote SME growth and innovation in the MENA Region.
MENA-OECD Investment Programme Working Paper.
Rosen, C. 2011. Employee ownership and corporate ownership: A review of research on employee ownership.
Digital publication, National Center for Employee Ownership.
51
Rudolph, H. 2009. State Financial Institutions: Mandates, Governance, and Beyond. Policy Research Working
Paper 5141, World Bank, Washington, DC.
Rudolph, H. 2009. State Financial Institutions: Can They Be Relied on to Kick-Start Lending? Crisis Response
Note 12, Financial and Private Sector Development Vice Presidency, World Bank, Washington, DC.
Sahlman, W. A. 1990. The structure and governance of venture-capital organizations. Journal of Financial
Economics 27: 473-521.
Sapienza, P. 2004. The effects of government ownership on bank lending. Journal of Financial Economics 72(2):
357–384.
Sapienza, H., S. Manigart and W. Vermeir. 1996. Venture Capitalist Governance and Value Added in Four
Countries. Journal of Business Venturing 11(6): 439–469.
Sciascia, S. and P. Mazzola. 2008. Family Involvement in Ownership and Management: Exploring Nonlinear
Effects on Performance. Family Business Review 21(4): 331-345.
Schmidt, K. 1996. The costs and benefits of privatization: an incomplete contracts approach. Journal of Law,
Economics, and Organization 12(1): 1-24.
Schmit, M. 2005. Is Automotive Leasing a Risky Business? Revue de l’association française de finance Vol 26.
No. 2: 35-66.
Schmit M. and J. Stuyck J. 2002. Recovery Rates in the Leasing Industry. Working paper, Leaseurope.
Schwartz, R.A. 1974. An Economic Model of Trade Credit. Journal of Financial and Quantitative Analysis 9:
643–657.
Schwartz, Robert A., and David Whitcomb. 1980. The trade credit decision, in J. Bicksler, ed.: Handbook of
Financial Economics, North-Holland, Amsterdam.
Sengupta, P. and Wang, Z. 2011. Pricing off-balance sheet debt: how bond market participants use the footnote
disclosures on operating leases and postretirement benefit plans? Accounting and Finance 51(3): 787-
808.
Sharpe, S., and H. Nguyen. 1995. Capital Market Imperfections and the Incentive to Lease. Journal of Financial
Economics 39: 271-294.
Shleifer, A., and R.W. Vishny. 1986. Large Shareholders and Corporate Control. Journal of Political Economy
94 (3): 461-488.
Shleifer, A., and R.W. Vishny. 1997. A survey of corporate governance. Journal of Finance 52 (2): 737–783.
Shleifer, Andrei. 1998. State versus Private Ownership. Journal of Economic Perspectives, 12(4): 133-150.
Smith, C. W., and J. B. Warner. 1979. On financial contracting: An analysis of bond covenants. Journal of
Financial Economics 7: 117–6.
Smith, J. K. 1987. Trade Credit and Informational Asymmetry. Journal of Finance 42(4): 863–872.
Smith J.K. and C. Schnucker. 1994. An empirical examination of organizational structure: the economics of the
factoring decision. Journal of Corporate Finance 1: 119–138.
Sopranzetti B.J. 1998. The Economics of Factoring Accounts Receivable. Journal of Economics and Business
50: 339-359.
Soufani, K. 2002. The decision to finance account receivables: the factoring option. Managerial and Decision
Economics 23: 21–32.
Summers B. and N. Wilson. 2000. Trade Credit Management and the Decision to Use Factoring: An Empirical
Study. Journal of Business Finance & Accounting 27/1: 37-68.
Stewart, A. and M.A. Hitt. 2012. Why Can’t a Family Business Be More Like a Nonfamily Business? Family
Business Review 25(1): 58-86.
Stockmans A., Lybaert N., Voordeckers W. 2010. Socio emotional Wealth and Earnings Management in Private
Family Firms. Family Business Review 23(3): 280-294
Tian, L. 2001. Government shareholding and the value of China’s modern firms. Working paper, London
Business School.
Tian, L. and Estrin, S., 2008. Retained state shareholding in Chinese PLCs: Does government ownership always
reduce corporate value? Journal of Comparative Economics, 36:74–89.
Tomasic, R., and N. Andrews. 2007. Minority Shareholder Protection in China’s Top 100 Listed Companies.
Australian Journal of Asian Law 9(1): 88-119.
Tong, Y. 2007. Financial reporting practice of family firms. Advances in Accounting 23(1): 231 – 261.
52
Uesugi, I., K. Sakai, and G. M. Yamashiro. 2010. Effectiveness of Credit Guarantees in the Japanese Loan
Market. Journal of the Japanese and International Economies 24(4): 457-480.
Van Caneghem, T., and G. Van Campenhout 2012. Quantity and quality of information and SME financial
structure. Small Business Economics 39: 341-358.
Vander Bauwhede, H., M. de Meyere and P. Van Cauwenberge. 2015. Financial reporting quality and the cost
of debt of SMEs. Small Business Economics 45: 149-164.
Vera, D., and K. Onji. 2010. Changes in the Banking System and Small Business Lending. Small Business
Economics 34 (3): 293-308.
Wang, L., and W. Judge. 2012. Managerial ownership and the role of privatization in transition economies: The
case of China. Asia Pacific Journal of Management 29(2): 479–498.
Wang, Q., T. J. Wong, and L. Xia. 2008. State Ownership, Institutional Environment, and Auditor Choice:
Evidence from China. Journal of Accounting and Economics 46 (1): 112– 34.
Wang, L. and K. Yung. 2011. Do State Enterprises Manage Earnings More than Privately Owned Firms? The
Case of China. Journal of Business Finance & Accounting 38(7&8): 794–812.
Ward, C., and V. Ramachandran. 2010. Crowdfunding the next hit: Microfunding online experience goods. Paper
presented at the Workshop on Computational Social Science and the Wisdom of Crowds at NIPS 2010.
Wardrop, R., Zhang, B., Rau, R. and Gray, M. 2015. Moving Mainstream: The European Alternative Finance
Benchmarking Report. Working paper, University of Cambridge.
Westhead, P. and C. Howorth. 2006. Ownership and Management Issues Associated with Family Firm
Performance and Company Objectives. Family Business Review, Vol. 19, No. 4, pp. 301-316.
Whittam, G., Talbot, S., and C. Mac an Bhaird. 2015. Can credit unions bridge the gap in lending to SMEs?
Working paper, Glasgow Caledonian University, University of the West of Scotland, and Dublin City
University.
Wilcox, J. 2011. The increasing importance of credit unions in small business lending. SBA Office of Advocacy
Report, United States Small Business Administration.
Wilson, N. and B. Summers. 2002. Trade Credit Terms Offered by Small Firms: Survey Evidence and Empirical
Analysis. Journal of Business Finance & Accounting 29 (3) & (4): 317–351.
Winther, G., and R. Marens. 1997. Participatory Democracy May Go A Long Way: Comparative Growth
Performance of Employee Ownership Firms in New York and Washington States. Economic and
Industrial Democracy 18(3): 393-422
Wongsunwai, W. 2013. The effect of external monitoring on accrual-based and real earnings management:
Evidence from venture-backed initial public offerings. Contemporary Accounting Research 30: 196-324.
World Bank. 2013. Global Financial Development Report 2013. Rethinking the Role of the State in Finance
(Washington: World Bank).
Xu, X. and Y. Wang. 1999. Ownership structure and corporate governance in Chinese stock companies. China
Economic Review 10:75–98.
Yang, X. 2014. The role of photographs in online peer-to-peer lending behavior. Social Behavior and Personality
42(3): 445-452
Zecchini, S. and M. Ventura. 2009. The impact of public guarantees on credit to SMEs. Small Business
Economics 32(2): 191-206.