Start-up Firms and Discretion Over Deferment of Disclosure: An ex Ante and an ex Post Perspective

Abstract

We examine deferment in the reporting of financial statements using an alternative measure of reporting delay based on start-up firms’ discretion over the length of the first reporting period. We explore discretion, exercised both by local GAAP adopters and by IFRS adopters, for a sample of Greek start-up firms using both an ex-ante and an ex-post research design. In addition to various factors previously considered by the accounting literature (i.e. performance, leverage, voluntary auditing, and the GAAP regime), we find that liquidity constraints, shareholders’ pressure, and increased noise in accounting measures are associated with a start-up firm’s reporting choice over the length of the first reporting period.

Keywords:

• reporting delay
• start-up firms
• length of the first reporting period

JEL Classification:

• M41

Acknowledgements

I would like to thank Araceli Mora (editor), Andrei Filip (associate editor) and two anonymous reviewers for their insightful suggestions. An initial draft of this study has been benefited by comments from seminar participants at the 2014 EAA Annual Congress, the 6th Financial Engineering and Banking Society National Conference (in Greece) and the 14th HFAA National Conference. I appreciate financial support from the University of Piraeus Research Center.

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 This policy has been discontinued for start-up firms established after 2014. See Section 2.1 for further details.

2 For example, a firm that is legally created in February 2009 and has decided that its accounting period will end in December might choose its first year-end to fall between (i) December 2009 and (ii) December 2010. The first choice will render an ‘under-twelve-month’ first reporting period (an 11-month period), whereas the second choice will render an ‘over-twelve-month’ first reporting period (a 23-month period).

3 Discretion in financial reporting delay can be justified on the grounds that start-up firms may not be fully operational during the first year after establishment, deferring the need to publish financial reports.

4 Under Greek corporate tax law, start-up firms that choose an ‘over-twelve-month’ period during the examined period can delay income tax payments (cash outflows) until after the delayed fiscal year-end. The calculation of income tax will be based on the annual tax rate imposed by the government for the fiscal period concerned, even though the cash outflow is delayed. For example, assume that a firm established in February 2005 selects a more extended reporting period (fiscal-year end on December 2006). This firm will calculate taxable income based on the 2005 tax rate (for both years) and tax payment will be delayed until after 1/1/2007.

5 For example, the International Accounting Standards Board and the Financial Accounting Standards Board have jointly accepted the importance of timeliness in the chapter ‘Qualitative characteristics of useful financial information’ in the Conceptual Framework for Financial Reporting.

6 IAS 1, par. 36–37 (January 2018). IAS stands for International Accounting Standard.

7 Recording lag is related to the delayed dissemination of relevant information into accounting numbers (i.e., Warfield and Wild (1992), Collins et al. (1994), Donnelly and Walker (1995), and Basu (1997), among others).

8 In contrast, start-up firms that follow IFRS are obliged to follow IFRS for at least five consecutive years and have their financial statements audited by external auditors.

9 For cases in which we did not find data related to AUD or OLD in the founding agreements (338 and 405 observations, respectively), we assign to these variables the value of zero. We then empirically explore a research design against our expectations concerning the statistical significance of AUD and OLD. Discarding these observations does not qualitatively affect our main inferences regarding the tested hypotheses.

10 It is not clear whether IFRS is measured on an ex-ante basis. On the one hand, start-up firms are not required to declare in their founding agreements which accounting regime they follow. Under Greek applicable corporate law, during the examined period, there were no restrictions on the timing of the IFRS adoption. Requirements regarding IFRS adoption were solely related to the reporting of fiscal year-end financial statements and not the daily operating environment of IFRS adopters (in contrast to local GAAP adopters that follow a specific chart of accounts). On the other hand, most firms in our sample that follow IFRS are subsidiaries of listed firms obliged to follow IFRS after 2005. This phenomenon suggests that the IFRS variable can be measured on an ex-ante basis if a listed firm was included among the initial co-founders of the start-up company.

11 We do not empirically examine Model 1 on an annual basis because of the low frequency of firms that choose an ‘under-twelve-month’ reporting period.

12 Since the initial sample includes observations with fiscal year-end in 2002, our sample includes firms founded in 2001. Moreover, because the initial sample includes observations with fiscal year-end in 2010, all firms that were established in 2010, by definition, have a ‘shorter’ reporting period. The lack of firms established in 2010 that use a more extended reporting period might affect our results, given that 2010 is the year in which the Greek government achieved a memorandum agreement regarding its fiscal policy and public debt. Thus, these firms were discarded.

13 The minimum capital requirement for founding an SA firm (€60.000) is greater than that for INC firms (€18.000); hence, the latter are generally considered smaller than SA firms. Moreover, INC firms have no board of directors, and most decisions require a majority in terms of both equity capital and the number of firm owners. For ‘limited liability firms with no shares’ that do not have boards of directors, we assign the lowest permitted value for BRD, which is three people, when these firm-year observations are included in the overall sample (WH1).

14 Non-tabulated result.

15 Non-tabulated result.

16 The percentage is computed over the total number of start-up firms.

17 Moreover, inferences from additional (non-tabulated) tests that exclude any performance related continuous variable (i.e., P_M) are qualitatively unchanged.

18 Non-tabulated result.

19 The level of €350,000 corresponds to the total assets criterion (one of the three size criteria) that has been adopted for reporting purposes (law 4308/2014) and differentiates very small reporting entities into small (firms with total assets between €350.000 and €4 million), medium (firms with total assets between €4 million and €20 million), and large entities (firms with total assets greater than €20 million). The other two criteria are sales and number of employees.

20 In Panel E of Table 2, we report a very strong positive correlation coefficient (0.50) between RP_period and D_term.

21 According to OECD et al. (2015, p. 50), small- and medium-sized enterprises ‘ … represent 99% of all businesses in the EU. In the past five years, they have created around 85% of new jobs and provided two-thirds of the total private sector employment in the EU’.

22 The increased importance of small- and medium-sized private firms is shown in the European Union by the EFRAG SME working group and the vote on Directive 2013/34/EU.