Transparency, Ownership, and Financing Constraints in Private Firms

The role that financial information plays in facilitating the flow of capital between external providers of capital and the firm is less obvious for private firms compared with public firms. We find that private firms that choose to have their financial information reviewed by an independent external auditor (our proxy for financial transparency) experience significantly lower problems with gaining access to external finance (and obtain those funds at a lower cost) than do other private firms. We further find that the effect of financial transparency in reducing financing constraints increases in the presence of a controlling shareholder, and that this joint effect is more pronounced in poorer countries with weaker institutional environments. We thus provide unique evidence on the joint role of financial transparency and ownership in a private firm setting. Our results are robust to controlling for firm-level characteristics, industry effects, and country-level variables, as well as controlling for self-selection biases related to the choice of having the financial information reviewed. Given the predominance of private firms around the world and the relatively scarce amount of research in this area, we add to the literature on the role of financial information for an important and interesting group of firms.