Media Releases

Improving financial reporting in private firms’ interest, new study of emerging markets suggests

March 14, 2011

TORONTO, ON – Improved finan­cial report­ing at pri­vate firms ben­e­fits not only poten­tial out­side investors but will help the firm make bet­ter busi­ness deci­sions for itself too, says a new study.

The study is authored by Ole-Kris­t­ian Hope, the Deloitte Pro­fes­sor of Account­ing and an asso­ciate pro­fes­sor of account­ing at the Rot­man School of Man­age­ment at the Uni­ver­si­ty of Toron­to, uses World Bank data on small pri­vate firms in 21 emerg­ing mar­ket coun­tries – Thai­land, Brazil and Pak­istan hav­ing the largest sam­ples. The data includes financ­ing sources and infor­ma­tion on tax envi­ron­ments. Pri­vate emerg­ing mar­ket com­pa­nies were cho­sen so researchers could study what hap­pens under con­di­tions with the fewest report­ing require­ments.

“With­in our sam­ple, the firms with high­er qual­i­ty account­ing on aver­age seem to make bet­ter invest­ment deci­sions,” says Prof. Hope, who co-wrote the paper with Rot­man col­league Feng Chen, Qingyuan Li of China’s Wuhan Uni­ver­si­ty and Xin Wang from The Chi­nese Uni­ver­si­ty of Hong Kong. The paper is forth­com­ing in The Account­ing Review.

While Prof. Hope admits it may be a “con­tentious point” that improved finan­cial account­ing can help firms inter­nal­ly as well as exter­nal­ly, “if you don’t have qual­i­ty in the under­ly­ing account­ing infor­ma­tion what will you base your deci­sions on?” he asks.

The paper also finds that firms with strong incen­tives to min­i­mize their tax­es – for exam­ple through high tax rates and strict enforce­ment – have poor­er qual­i­ty finan­cial report­ing and there­fore make less effi­cient invest­ment deci­sions.

The paper sheds light on an under-researched area of the finan­cial world. Most stud­ies on report­ing qual­i­ty look at pub­licly-trad­ed com­pa­nies; despite the fact pri­vate firms make up a much big­ger piece of the eco­nom­ic pie and dom­i­nate emerg­ing mar­kets. There is also very lit­tle pri­or research on firms in emerg­ing mar­kets.

“Pri­vate firms employ four times as many employ­ees, have three times as much rev­enue, and twice as much in glob­al assets. So they’re impor­tant,” points out Prof. Hope.

The com­plete study is avail­able at:

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Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
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