Creditors’ and Shareholders’ Reporting Demands in Public Versus Private Firms: Evidence from Europe

In this study we ask two questions: Is the timeliness of economic income recognition in public financial statements sensitive to shareholders’ and creditors’ information needs? And if so, do shareholders and creditors have similar timeliness demands? Because several economic income components are inherently uncertain and costly to verify, firms’ timeliness decisions are a cost-benefit trade-off for which a good understanding of shareholders’ and creditors’ reporting demands is essential. The accounting literature is undecided as to whether shareholders demand symmetrically timely recognition of gains and losses (hereafter: symmetric timeliness) or timelier loss than gain recognition (hereafter: asymmetric timeliness or conservatism) (see e.g., Guay and Verrecchia 2006; LaFond and Watts 2008). In contrast, the consensus opinion seems to be that creditors demand asymmetric timeliness because of the asymmetry in their payoff from lending (see e.g., Ahmed, Billings, Morton, and Stanford-Harris 2002; Ball, Robin, and Sadka 2008; Nikolaev 2007; Watts 2003; Wittenberg-Moerman 2008). Some prior studies question, however, whether creditors’ asymmetric timeliness demands are truly reflected in publicly disclosed general purpose financial reports or only affect contractual provisions and privately communicated special purpose reports (e.g., Guay and Verrecchia 2006).

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