Public Peers, Accounting Comparability, and Value Relevance of Private Firms’ Financial Reporting

Abstract

We examine whether higher accounting comparability between public and private firms facilitates the valuation of private firms and, in particular, impacts the value relevance of private firms’ financial reporting in M&A transactions. To help develop our hypotheses, we conduct a series of interviews with M&A valuation experts to obtain insights on the private firm valuation process. Using a large sample of private target firm M&As in the European Union, we predict and find that the financial reporting of private firms that follow the same accounting standards as public firms has higher value relevance. This relation is more pronounced for private firms in industries with more public companies. Furthermore, our analysis around 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 reporting. These findings are consistent with higher accounting comparability facilitating a spillover of valuation information from public to private markets.