The Silent Majority: Private U.S.Firms and Financial Reporting Choices
P E T R O L I S O W S K Y∗ AND M I C H A E L MI N N I S†
Received 12 April 2018; accepted 27 March 2020
ABSTRACT
This study uses a comprehensive panel of tax returns to examine the financial
reporting choices of medium-to-large private U.S. firms, a setting that
controls over $9 trillion in capital, vastly outnumbers public U.S. firms across
all industries, yet has no financial reporting mandates. We find that nearly
two-thirds of these firms do not produce audited GAAP financial statements.
Guided by an agency theory framework, we find that size, ownership dispersion,
external debt, and trade credit are positively associated with the choice
to produce audited GAAP financial statements, while asset tangibility, age,
and internal debt are generally negatively related to this choice. Our findings
reveal that (1) equity capital and trade credit exhibit significant explanatory
power, suggesting that the primary focus in the literature on debt is too narrow;
(2) firm youth, growth, and R&D are positively associated with audited
GAAP reporting, reflecting important monitoring roles of financial reporting;
and (3) many firms violate standard explanations for financial reporting
choices and substantial unexplained heterogeneity in financial reporting remains.
We conclude by identifying opportunities for future research.