FEK seminar series - Tonny Stenheim (School of Business, USN)

Fundamental Performance and Earnings Quality in Private Firms

Abstract
This paper examines the effect of a negative shock to performance on earnings quality in a private firm setting. Private firms are fundamentally different from public firms, with the consequence that results from public firms may not be generalizable to private firms (e.g. Ball & Shivakumar, 2005; Burghstahler, Hail, & Leuz, 2006; Hope, Langli, & Thomas, 2012). Fundamental performance is unobservable and therefore difficult to measure. Existing research has used proxies that are subject to estimation errors and endogeneity concerns (e.g. Balsam, Haw, & Lilien, 1995; Mark L. DeFond & Park, 1997). This study attempts to overcome this issue by taking advantage of the exogenous shock in oil price which ocurred in 2014 and using a difference-in-differences approach to investigate the effect of a negative shift in performance on earnings quality. The results suggest that a negative shock in fundamental performance lowers earnings quality.

FEK seminar series