The Silent Majority: Private U.S. Firms and Financial Reporting Choices

We provide new evidence on the production of audited GAAP financial statements by large U.S. privately held firms. We find that over 60% of these firms, which control $4 trillion of assets, do not produce audited GAAP financial statements. Using across industry, within industry, and within firm tests over time, our analyses reveal that several important characteristics — such as profitability, firm age, growth, ownership changes, and presence of intangibles — partially explain this variation. These findings are consistent with financial statements reducing information asymmetry and serving a stewardship role. However, economically substantial variation remains unexplained by traditional variables. Our findings suggest that incomplete contracting and alternative mechanisms, such as relationships and tangible assets, are useful alternatives to producing audited GAAP financial statements, even for large firms. Our study informs researchers, standard setters, and regulators on the actual use of audited GAAP financial statements in the broader U.S. economy and raises additional questions for future research.