Public Peers, Accounting Comparability, and Value Relevance of Private Firms’ Financial Reporting
We examine whether higher accounting comparability between public and private firms increases the value relevance of private firms’ financial reporting. We first conduct a series of interviews with M&A valuation experts to obtain insights into the private firm valuation process to help motivate our predictions. Using a large sample of private target firm M&As in the European Union, we predict and find that the reported financial information of private firms that follow the same accounting standards as public firms have higher value relevance. This relation is stronger for private firms in industries with more public companies. Furthermore, our analysis of the mandatory adoption of IFRS by public companies suggests that private firms that do not adopt the new public standard show a decrease in the value relevance of their financial reporting. These findings are consistent with higher accounting comparability facilitating a spillover of valuation information from public to private markets, which impacts the value relevance of private firms’ reported financial information.