IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v24y2019i3d10.1007_s11142-019-09495-y.html
   My bibliography  Save this article

Organizational structure and earnings quality of private and public firms

Author

Listed:
  • Massimiliano Bonacchi

    (University of Bolzano)

  • Antonio Marra

    (Bocconi University)

  • Paul Zarowin

    (New York University)

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.

Suggested Citation

  • Massimiliano Bonacchi & Antonio Marra & Paul Zarowin, 2019. "Organizational structure and earnings quality of private and public firms," Review of Accounting Studies, Springer, vol. 24(3), pages 1066-1113, September.
  • Handle: RePEc:spr:reaccs:v:24:y:2019:i:3:d:10.1007_s11142-019-09495-y
    DOI: 10.1007/s11142-019-09495-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-019-09495-y
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s11142-019-09495-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. A. Smith, Jeffrey & E. Todd, Petra, 2005. "Does matching overcome LaLonde's critique of nonexperimental estimators?," Journal of Econometrics, Elsevier, vol. 125(1-2), pages 305-353.
    2. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(4), pages 605-654.
    3. Bernard, Darren & Burgstahler, David & Kaya, Devrimi, 2018. "Size management by European private firms to minimize proprietary costs of disclosure," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 94-122.
    4. Mary E. Barth & Wayne R. Landsman & Mark H. Lang, 2008. "International Accounting Standards and Accounting Quality," Journal of Accounting Research, Wiley Blackwell, vol. 46(3), pages 467-498, June.
    5. Ole-Kristian Hope & Dushyantkumar Vyas, 2017. "Private company finance and financial reporting," Accounting and Business Research, Taylor & Francis Journals, vol. 47(5), pages 506-537, July.
    6. Julian Franks & Colin Mayer & Paolo Volpin & Hannes F. Wagner, 2012. "The Life Cycle of Family Ownership: International Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1675-1712.
    7. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    8. Radhakrishnan Gopalan & Sudarshan Jayaraman, 2012. "Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms," Journal of Accounting Research, Wiley Blackwell, vol. 50(1), pages 117-157, March.
    9. Jochen Bigus & Nadine Georgiou & Philipp Schorn, 2016. "Legal Form and Earnings Properties," European Accounting Review, Taylor & Francis Journals, vol. 25(3), pages 515-548, September.
    10. Leuz, Christian & Wüstemann, Jens, 2003. "The role of accounting in the German financial system," CFS Working Paper Series 2003/16, Center for Financial Studies (CFS).
    11. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    12. Ball, Ray & Shivakumar, Lakshmanan, 2005. "Earnings quality in UK private firms: comparative loss recognition timeliness," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 83-128, February.
    13. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    14. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    15. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    16. Siming Liu & Len Skerratt, 2018. "Earnings quality across different reporting regimes," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 19(1), pages 2-19, February.
    17. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "Corrigendum to "The effect of international institutional factors on properties of accounting earnings"; [Journal of Accounting and Economics 29 (2000) 1-51]," Journal of Accounting and Economics, Elsevier, vol. 30(2), pages 241-241, October.
    18. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    19. Goncharov, Igor & Werner, Joerg R. & Zimmermann, Jochen, 2009. "Legislative demands and economic realities: Company and group accounts compared," The International Journal of Accounting, Elsevier, vol. 44(4), pages 334-362, December.
    20. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    21. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    22. Leuz, Christian, 2006. "Cross listing, bonding and firms' reporting incentives: A discussion of Lang, Raedy and Wilson (2006)," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 285-299, October.
    23. Michael Minnis, 2011. "The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms," Journal of Accounting Research, Wiley Blackwell, vol. 49(2), pages 457-506, May.
    24. Sharon Belenzon & Tomer Berkovitz & Luis A. Rios, 2013. "Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups," Management Science, INFORMS, vol. 59(6), pages 1326-1343, June.
    25. Hope, Ole-Kristian & Langli, John Christian & Thomas, Wayne B., 2012. "Agency conflicts and auditing in private firms," Accounting, Organizations and Society, Elsevier, vol. 37(7), pages 500-517.
    26. Mara Faccio & Larry HP Lang & Leslie Young, 2010. "Pyramiding vs leverage in corporate groups: International evidence," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(1), pages 88-104, January.
    27. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
    28. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
    29. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    30. Christensen, Hans B. & Hail, Luzi & Leuz, Christian, 2013. "Mandatory IFRS reporting and changes in enforcement," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 147-177.
    31. Jeong†Bon Kim & Cheong H. Yi, 2006. "Ownership Structure, Business Group Affiliation, Listing Status, and Earnings Management: Evidence from Korea," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 427-464, June.
    32. Ball, Ray & Robin, Ashok & Wu, Joanna Shuang, 2003. "Incentives versus standards: properties of accounting income in four East Asian countries," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 235-270, December.
    33. Christopher S. Armstrong & Alan D. Jagolinzer & David F. Larcker, 2010. "Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 225-271, May.
    34. Nagar, Venky & Petroni, Kathy & Wolfenzon, Daniel, 2011. "Governance Problems in Closely Held Corporations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 943-966, August.
    35. Christian Leuz, 2010. "Different approaches to corporate reporting regulation: How jurisdictions differ and why," Accounting and Business Research, Taylor & Francis Journals, vol. 40(3), pages 229-256.
    36. John Asker & Joan Farre-Mensa & Alexander Ljungqvist, 2015. "Corporate Investment and Stock Market Listing: A Puzzle?," The Review of Financial Studies, Society for Financial Studies, vol. 28(2), pages 342-390.
    37. Peter D. Wysocki, 2004. "Discussion of Ultimate Ownership, Income Management, and Legal and Extra‐Legal Institutions," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 463-474, May.
    38. Radhakrishnan Gopalan & Vikram Nanda & Amit Seru, 2014. "Internal Capital Market and Dividend Policies: Evidence From Business Groups," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1102-1142.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luca Menicacci, 2022. "Financial reporting and book-tax conformity: A review of the issues," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2022(1), pages 41-77.
    2. Andrew B. Jackson, 2022. "Residuals from two‐step research designs," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4345-4358, December.
    3. Luca Menicacci & Lorenzo Simoni, 2024. "Negative media coverage of ESG issues and corporate tax avoidance," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 15(7), pages 1-33, February.
    4. Tobar Arias, José E. & Mora Valencia, Andrés & Benavides Franco, Julián, 2023. "Earnings management to avoid losses: Evidence in non-listed Colombian companies," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 53(C).
    5. Floropoulos, Stylianos & Tsipouridou, Maria & Spathis, Charalambos, 2024. "Book-tax conformity and earnings management: A research agenda," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    6. Juan Pedro Sánchez‐Ballesta & José Yagüe, 2021. "Financial reporting incentives, earnings management, and tax avoidance in SMEs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1404-1433, July.
    7. Yang, Jingwen & Hemmings, Danial & Jaafar, Aziz & Jackson, Richard H.G., 2022. "The real earnings management gap between private and public firms: Evidence from Europe," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Masahiro Enomoto, 2018. "Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities," Discussion Paper Series DP2018-06, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2020.
    2. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Hans B. Christensen & Edward Lee & Martin Walker & Cheng Zeng, 2015. "Incentives or Standards: What Determines Accounting Quality Changes around IFRS Adoption?," European Accounting Review, Taylor & Francis Journals, vol. 24(1), pages 31-61, May.
    4. Marra, Antonio & Mazzola, Pietro & Prencipe, Annalisa, 2011. "Board Monitoring and Earnings Management Pre- and Post-IFRS," The International Journal of Accounting, Elsevier, vol. 46(2), pages 205-230, June.
    5. Himanshu & Jatinder P. Singh & Ashwani Kumar, 2020. "Prioritizing and Establishing Cause and Effect Relationships Among Financial Reporting Quality Metrics," Vision, , vol. 24(3), pages 330-344, September.
    6. Filip, Andrei & Raffournier, Bernard, 2014. "Financial Crisis And Earnings Management: The European Evidence," The International Journal of Accounting, Elsevier, vol. 49(4), pages 455-478.
    7. Belén Gill de Albornoz Noguer & Simona Rusanescu, 2017. "Foreign ownership and financial reporting quality in private subsidiaries," Working Papers. Serie EC 2017-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    8. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    9. Eliwa, Yasser & Haslam, Jim & Abraham, Santhosh, 2021. "Earnings quality and analysts’ information environment: Evidence from the EU market," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    10. Trimble, Madeline, 2018. "A reinvestigation into accounting quality following global IFRS adoption: Evidence via earnings distributions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 33(C), pages 18-39.
    11. Kamarudin, Khairul Anuar & Ariff, Akmalia M. & Jaafar, Aziz, 2020. "Investor protection, cross-listing and accounting quality," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(1).
    12. Aase, Øivind André Strand, 2022. "Effects of Voluntary Audit on Accounting Quality in Small Private Firms," Discussion Papers 2022/1, Norwegian School of Economics, Department of Business and Management Science.
    13. Houqe, Muhammad Nurul & Monem, Reza M. & Tareq, Mohammad & van Zijl, Tony, 2016. "Secrecy and the impact of mandatory IFRS adoption on earnings quality in Europe," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 476-490.
    14. Dung Viet Tran & M. Kabir Hassan & Reza Houston, 2020. "Discretionary loan loss provision behavior in the US banking industry," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 605-645, August.
    15. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    16. Jennifer Martínez-Ferrero, 2014. "Consequences of financial reporting quality on corporate performance. Evidence at the international level," Estudios de Economia, University of Chile, Department of Economics, vol. 41(1 Year 20), pages 49-88, June.
    17. Zhang, Yuyang & Uchida, Konari & Bu, Hua, 2013. "How do accounting standards and insiders' incentives affect earnings management? Evidence from China," Emerging Markets Review, Elsevier, vol. 16(C), pages 78-99.
    18. Chan, Ann L.-C. & Hsu, Audrey W.-H. & Lee, Edward, 2015. "Mandatory adoption of IFRS and timely loss recognition across Europe: The effect of corporate finance incentives," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 70-82.
    19. Oz, Ibrahim Onur & Yelkenci, Tezer, 2018. "Examination of real and accrual earnings management: A cross-country analysis of legal origin under IFRS," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 24-37.
    20. Houqe, Muhammad Nurul & van Zijl, Tony & Dunstan, Keitha & Karim, A.K.M. Waresul, 2012. "The Effect of IFRS Adoption and Investor Protection on Earnings Quality Around the World," The International Journal of Accounting, Elsevier, vol. 47(3), pages 333-355.

    More about this item

    Keywords

    Private firms; Business groups; Standalone; Stakeholder incentives; Earnings quality; Non-market forces;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:24:y:2019:i:3:d:10.1007_s11142-019-09495-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.