Disclosure Incentives and Data Availability for Private Firms : Implications for Comparisons of Public and Private Firm Financial Reporting Quality

For private firms, public disclosure of financial information is often at management's discretion. We argue that differences in incentives to publicly disclose result in differences in data availability for private firms, which in turn can affect the conclusions of studies that rely on private firm data. We examine this point in the context of the literature documenting mixed evidence on differences between public and private firm financial reporting quality (FRQ). Using data surrounding a 2006 regulation change that dramatically strengthened enforcement of public disclosure requirements for German private firms, we compare the FRQ of three groups of firms: Private firms that voluntarily disclose financial statement information (“private voluntary” firms), private firms that disclose only due to effective enforcement of mandatory disclosure requirements (“private mandatory” firms), and public firms that are all subject to mandatory disclosure requirements. We find little or no evidence that private voluntary firms have different FRQ from public firms. However, we find consistent evidence that private mandatory firms have lower FRQ than both public firms and private voluntary firms. The results suggest that understanding the effect of disclosure incentives on private firm data availability is critical to interpreting the results of studies that rely on private firm data