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Review of Accounting Studies

Erschienen in:

28.06.2019

Organizational structure and earnings quality of private and public firms

verfasst von: Massimiliano Bonacchi, Antonio Marra, Paul Zarowin

Erschienen in: Review of Accounting Studies | Ausgabe 3/2019

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Abstract

We examine how heterogeneity in organizational structure affects private firm earnings quality in the European Union. Organizational structure refers to whether the firm is organized as a single legal entity (standalone) or as a business group. Private firms can be organized either way, while public firms are de facto groups. Even though private firms are not affected by market forces, we show that private business groups face greater stakeholder pressure for earnings quality than do standalone firms, while standalone firms have stronger tax minimization incentives. Due to these differences in nonmarket forces, private business groups have higher earnings quality than standalone firms. This heterogeneity among private firms is an important unexplored factor in the study of private firms, affecting the comparison between public and private firm earnings quality. We find that overall, public firms have higher earnings quality than private firms but this relation reverses when we control for nonmarket forces by examining business groups only.

Vorheriger Artikel Mandatory IFRS adoption and analyst forecast accuracy: the role of financial statement-based forecasts and analyst characteristics

Nächster Artikel Overconfidence and Corporate Tax Policy

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This definition is consistent with the EU legal concept of corporate groups (Windbichler 2000) and with much of the academic work that focuses on corporate groups (Belenzon et al. 2013; Faccio et al. 2010).

The terms earnings quality, financial reporting quality, accounting quality, and accruals quality have been used interchangably in the literature.

In the European countries we analyze, individual statements are used to determine the tax obligation, and the same tax rules apply for private and public firms (Burgstahler et al. 2006; Leuz and Wüstemann 2003; Pierk 2016; Watrin et al. 2014).

Public standalone firms can exist in theory, but we do not observe any in our sample. Moreover, on Compustat, all the U.S. firms provide consolidated financial statements; i.e., they are business groups.

In untabulated robustness tests, to test for the effect of tax incentives, Burgstahler et al. (2006) re-run separate analyses either using observations from consolidated financial statement data or observations from unconsolidated (or parent-only) accounts, because the alignment of tax and financial accounting is commonly based on the parent-only accounts. Even though they find a much larger and more significant tax effect, using the subsample of unconsolidated accounts, they do not find evidence of a differential tax effect between public and private firms for either of the two subsamples, which might be due to the substantial decrease in sample size.

Data are available here:

http://databank.worldbank.org/data/reports.aspx?source=2&series=CM.MKT.LDOM.NO&country=#advancedDownloadOptions;https://ec.europa.eu/growth/smes/business-friendly-environment/performance-review_en#sba-fact-sheets.

The two-sample Kolmogorov–Smirnov test confirms that the distributions are significantly different from each other.

For example, as Watrin et al. (2014, 59) point out, “Corporate income tax is levied at the single-entity level, which means that every parent and subsidiary is obliged to prepare separate tax statements and to pay taxes. The tax laws of member states frequently allow for group taxation within the territory in question, and some allow for losses that occurred in other member states to be deducted. However, income is generally not taxed based on a consolidated European or international income statement. Even under group taxation, taxable income is assessed at the single-entity level and then consolidated for the group. Thus, even in the case of group taxation, the single financial statement is the basis for taxable income in countries with high book-tax conformity.”

We have data for fiscal years 2004–2014 and use 2004 to construct lags. This yields a 10-year unbalanced panel.

See http://ec.europa.eu/eurostat/web/national-accounts/statistics-illustrated for national statistics in Europe.

For a summary of the size thresholds and source references, see Appendix C of Bernard et al. (2018).

The relative proportions of public and private business groups, among the different countries, resemble the ones in the work of Coppens and Peek (2005), Table 1. Additionally, in our sample, within each country the industry distribution of private and public firms is similar.

As a robustness check, we also use Dechow and Dichev (2002) abnormal accruals and Kothari et al. (2005) performance-matched discretionary accruals with similar results (untabulated).

We calculate cash flow from operations using the balance-sheet approach, because U.S. style cash flow statements are generally not available for our sample of private and public European companies.

The difference in operating cycles is not due to industry effects, since, as pointed out above, the industry compositions of all three groups are similar.

Results are similar if we use Hope et al.’s (2013) research design (untabulated).

In Table 5, for each individual country, the mean difference and t-statistic are computed from a firm-year level regression of the stakeholder metric against a dummy variable for business group versus standalone, with industry and year fixed effects and clustering standard errors at the firm level. The aggregate statistics are computed from the mean of the 11 country differences.

As a robustness test, we also use the Dechow and Dichev (2002) and Kothari et al. (2005) earnings management proxies, with similar results to those reported in the paper. Results are qualitatively and quantitalively similar using accounts payable scaled by assets instead of Inv_Int as an independent variable.

To avoid counfounding effects in this model, we do not include leverage (LEV) as control, as this is also a proxy for stakeholders demand. Nonetheless, we run a sensitivity test (untabulated), and results hold above and beyond the inclusion of such control.

Note that, in Table 7, Columns 1 and 2, the dependent variable is unsigned, while in Table 8, the dependent variable is signed.

The coefficients of the control variables at the country level are consistent with those in Table 9, Panel A (except, of course, for LEGAL, which is not in the country-level regressions, since it is a constant at the country level).

Most studies of U.S. private firms, such as those by Asker et al. (2015), Minnis (2011), Hope et al. (2013), use the Sageworks database, which does not disclose firm names or whether a firm is a business group or a standalone (Asker et al. 2015).

When we estimate equation (9) with only leverage or inventory intensity as the sole independent variable, neither is significant. This shows that it is not the other independent variable that is causing leverage and inventory intensity to be insignificant. By contrast, Table 5 showed that business groups and standalone firms differed in their stakeholder pressure, as proxied by inventory intensity and leverage. The different results for inventory intensity and leverage in Table 5 versus Table 11, Panel A, are due to the fact that the different tests flip the independent and dependent variables and consequently have different statistical properties (different coefficients and different error terms) and different interpretations. Despite the fact that standalone firms and business groups have different inventory intensity and leverage ex-post (Table 5), inventory intensity, and leverage are not important determinants of the choice to become a business group ex-ante (Table 11, Panel A).

We also replicate the analysis on a country basis (untabulated), and results are quantitatively and qualitatively similar to the ones reported in Table 9, Panel B, using standard OLS.

We also use a different specification by including the percentage owned by the three largest shareholders.

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Titel: Organizational structure and earnings quality of private and public firms
verfasst von: Massimiliano Bonacchi
Antonio Marra
Paul Zarowin
Publikationsdatum: 28.06.2019
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 3/2019
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-019-09495-y

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