Morning Knowledge /6. Corporate Reports

YOU COULD THINK LISTED COMPANIES' FINANCIAL REPORTS TO BE MORE RELIABLE THAN THOSE OF PRIVATE COMPANIES. ANTONIO MARRA INVITES YOU TO THINK AGAIN. WHICH INCENTIVES DO YOU THINK LISTED COMPANIES HAVE TO MISREPORT EARNINGS?


When you compare comparables (i.e. companies with a similar organizational structure), private companies display a higher accounting quality than listed ones, Professor Antonio Marra finds.
 
Listed companies, in fact, have a strong incentive to over-report earnings to improve their short-term market performance and in the European Union this incentive outweighs market discipline in determining earnings quality. This result implies that investors might be better off if they gave a closer look to private companies in building up their investments portfolios.
 
A notable exception to the rule, though, is the UK, where public companies exhibit more reliable accounts than private ones. The UK market is the most developed in Europe, with the best protection for investors. When rules are effectively enforced, earnings quality improves.
 
Do you think companies have other incentives to misreport earnings?

by Fabio Todesco