Does Public Ownership Of Equity Improve Earnings Quality?

The author compared the quality of accounting numbers produced by two types of public firms - those with publicly-traded equity and those with privately-held equity that are nonetheless considered public by virtue of having publicly-traded debt. Author developed and tested two hypotheses. The "Demand" hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to stronger demand by investors and creditors for quality reporting. In contrast, the "Opportunistic behavior" hypothesis posits that public equity firms, because their managers have a greater incentive to manage earnings, have lower earnings quality than their private equity peers.