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Journal of International Business Studies

, Volume 42, Issue 7, pp 935–957 | Cite as

Financial credibility, ownership, and financing constraints in private firms

  • Ole-Kristian HopeEmail author
  • Wayne Thomas
  • Dushyantkumar Vyas
Article

Abstract

As shown in the international business literature, the ability of controlling owners to extract private benefits is greater in countries with weaker legal institutions. In these countries, providing credible financial information could play an especially important role in reducing information asymmetry between private firms and external providers of finance. For our sample of firms across 68 countries, we find that firms with greater financial reporting credibility (i.e., annual financial statements reviewed by an external auditor) experience significantly lower perceived problems in gaining access to external finance. Further, the impact of financial credibility in reducing financing constraints in the presence of a controlling owner is more pronounced in countries with weaker creditor rights. Given the predominance of private firms around the world, their economic significance, and the fact that an increasing number of private firms now operate in multinational environments with different institutional features, we contribute to the literature on the role of financial information, firm characteristics, and country-level institutions for an important and interesting group of firms.

Keywords

auditing ownership legal enforcement private companies financing constraints creditor rights 

Notes

Acknowledgements

The authors are grateful for comments received from three anonymous reviewers, John Cantwell (Editor-in-Chief), Andrew Karolyi, and David Reeb (Editors), and workshop participants at the Norwegian School of Economics and Business Administration, ESSEC, National University of Singapore, Singapore Management University, the Financial Accounting and Reporting Section Midyear Meeting (New Orleans), the International Section Midyear Meeting (St Pete's), the LBS Transatlantic Doctoral Conference, the 2nd Annual Corporate Governance and Fraud Prevention Conference (George Mason), the American Accounting Association Annual Meeting (New York), the Financial Economics and Accounting Conference (Rutgers), and the University of Technology Sydney Summer Symposium (Sydney). Hope acknowledges the financial support of the Deloitte Professorship.

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Copyright information

© Academy of International Business 2011

Authors and Affiliations

  • Ole-Kristian Hope
    • 1
    Email author
  • Wayne Thomas
    • 2
  • Dushyantkumar Vyas
    • 3
  1. 1.Rotman School of Management, University of TorontoTorontoCanada
  2. 2.John T. Steed School of Accounting, Michael F. Price College of Business, University of OklahomaNormanUSA
  3. 3.Carlson School of Management, University of MinnesotaMinneapolisUSA

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