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It is difficult to observe underlying market and regulatory effects by studying public firms in a single country, because there is little variation in their market and regulatory environment. One solution is to study international variation in market and regulatory regimes.3 However, it is well-known that correlated omitted variables are a concern in this literature. Differences between private and public firms, controlling for size and industry as in Ball and Shivakumar (2005), are comparatively but not totally free of this concern.4 IPOs provide an alternative research design in which the status of their financial reporting changes from private to public. The omitted variables problem is somewhat mitigated in this research design because it is the same firm in the same industry that undergoes a transition in status.5 In our sample of UK IPOs [described below], we can compare financials originally prepared by a private firm with financials for the same firm and the same year that were restated several years later for inclusion in a public prospectus, further mitigating the omitted variables problem. Our first motivation for studying IPO financial reporting therefore is to provide a robust test of the hypothesis that, as their IPO approaches and they encounter different market and regulatory demands, companies increase their financial reporting quality.
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