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Financial credibility, ownership, and financing constraints in private firms

Author

Listed:
  • Ole-Kristian Hope

    (Rotman School of Management, University of Toronto, Toronto, Canada)

  • Wayne Thomas

    (John T. Steed School of Accounting, Michael F. Price College of Business, University of Oklahoma, Norman, USA)

  • Dushyantkumar Vyas

    (Carlson School of Management, University of Minnesota, Minneapolis, USA)

Abstract

As shown in the international business literature, the ability of controlling owners to extract private benefits is greater in countries with weaker legal institutions. In these countries, providing credible financial information could play an especially important role in reducing information asymmetry between private firms and external providers of finance. For our sample of firms across 68 countries, we find that firms with greater financial reporting credibility (i.e., annual financial statements reviewed by an external auditor) experience significantly lower perceived problems in gaining access to external finance. Further, the impact of financial credibility in reducing financing constraints in the presence of a controlling owner is more pronounced in countries with weaker creditor rights. Given the predominance of private firms around the world, their economic significance, and the fact that an increasing number of private firms now operate in multinational environments with different institutional features, we contribute to the literature on the role of financial information, firm characteristics, and country-level institutions for an important and interesting group of firms.

Suggested Citation

  • Ole-Kristian Hope & Wayne Thomas & Dushyantkumar Vyas, 2011. "Financial credibility, ownership, and financing constraints in private firms," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 42(7), pages 935-957, September.
  • Handle: RePEc:pal:jintbs:v:42:y:2011:i:7:p:935-957
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    Citations

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    Cited by:

    1. Mark Clatworthy & Michael Peel, 2016. "The Timeliness of UK Private Company Financial Reporting: Regulatory and Economic Influences," Bristol Accounting and Finance Discussion Papers 16/3, School of Economics, Finance, and Management, University of Bristol, UK.
    2. 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.
    3. Camacho-Miñano, María-del-Mar & Campa, Domenico, 2014. "Integrity of financial information as a determinant of the outcome of a bankruptcy procedure," International Review of Law and Economics, Elsevier, vol. 37(C), pages 76-85.
    4. repec:bla:acctfi:v:57:y:2017:i:2:p:565-595 is not listed on IDEAS
    5. Gokalp, Omer N. & Lee, Seung-Hyun & Peng, Mike W., 2017. "Competition and corporate tax evasion: An institution-based view," Journal of World Business, Elsevier, vol. 52(2), pages 258-269.
    6. repec:eee:spacre:v:20:y:2017:i:1:p:63-72 is not listed on IDEAS
    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).

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