Causes and Consequences of Improvements in the Information Environment for Swedish Small and Mid-Sized Firms

Abstract

We investigate improvements in the information environment and financing decisions for Swedish small and mid-sized firms. These firms are required to file audited annual reports. We create an index capturing accounting standards choices, auditor quality, and board size reflecting information environment improvements. We find an association between increased short-term financing and information environment improvements: The most common actions are to switch to a Big 4 auditor or a chartered accountant and to add independent board members as opposed to changing the accounting standards used. These improvements are associated with a switch to long-term debt and a reduction of cost of debt. Our findings are relevant for the ongoing discussion on accounting regulation for private firms both in the USA and Europe since they show that (Swedish) private firms use other ways to improve the information environment in order to access to less costly long-term bank debt besides adopting International Financial Reporting Standards.

Keywords:

• private firms
• SMEs
• information environment
• cost of debt
• IFRS

Acknowledgements

We thank session participants at the AAA annual meeting in Anaheim 2013, participants at the AAA International Accounting Section mid-year meeting in San Antonio 2014, and workshop participants at the University of Exeter, University of Stirling, and University of Essex for useful comments and suggestions. We also thank Professors Lisa Evans, Alan Goodacre, Joanne Horton and Patrick Vorst for valuable feedback on earlier versions of the paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Prior research refers to the information environment as information available to evaluate firms’ position and future prospects (Byard et al., 2011; Horton et al., 2013; Kang et al., 2012; Maffett, 2012). The information environment allows management to communicate useful information to external stakeholders as well as helping external stakeholders assess this information.

2 In general, discounts for early payment and the penalties for late payment are substantial making this form of financing very expensive (Petersen & Rajan, 1994).

3 Small private Swedish firms can choose to use Swedish GAAP, IFRS as at 2005 or pick individual standards from IFRS as at 2005. Please refer to the background and regulatory setting below for further discussion.

4 There are differences in interpretation of the term ‘private company’ within the EU and firms referred to as a ‘public limited companies’ in for instance France and Germany are not listed. We define private companies as companies without public debt or equity (cfr. Nobes, 2010).

5 Member states are allowed to make exceptions based on size measured on revenues, total assets, and number of employees (as outlined European Commission ‘COMMISSION STAFF WORKING DOCUMENT’ on the implementation of Commission Recommendation of 6 May 2003 concerning the definition of micro, small, and medium-sized enterprises http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/)

6 REGULATION (EC) No 1606/2002 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 July 2002 on the application of international accounting standards.

7 European Commission's Consultation of the International Financial Reporting Standard for Small and Medium-sized Entities, May 2010. (http://ec.europa.eu/internal_market/accounting/sme_accounting/review_directives_en.htm)

8 http://europa.eu/rapid/press-release_MEMO-13-540_en.htm

9 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:182:0019:0076:EN:PDF

10 Förordning om revisiorer 1995:665 (Regulation of Auditors 1995:665) (http://www.riksdagen.se/sv/Dokument-Lagar/Lagar/Svenskforfattningssamling/Forordning-1995665-om-revis_sfs-1995-665/?bet=1995:665)

11 One could also argue that to the degree that Swedish GAAP is more conservative than IFRS, lenders may actually prefer Swedish GAAP over IFRS. Hellman (2011) however suggests that already in the 1990s the conservatism in Swedish GAAP is declining and Street (2002) shows that Swedish GAAP does not differ a lot from IFRS, compared to other local GAAP.

12 http://www.bolagsverket.se/

13 We use a variant of the former measure for small- and medium-sized companies used in the EU and include firms with more than 10 employees and revenues ranging between €2M and less than €50M (equivalent to $2.6M and $65M using the €/$ exchange rate at the end of 2011).

14 All continuous variables are winsorized at the 1st and 99th percentiles to control for outliers.

Additional information

Funding

Annelies Renders acknowledges financial support from the NWO [Veni Research grant number Marita Blomkvist acknowledges financial support from the Knowledge Foundation (Dnr: 20120317) 016.135.086].