Investors would be better off increasing the share of unlisted companies in their portfolios and not trusting only the listed ones. This is the advice that emerges from a study conducted by Bocconi, the University of Bolzano and the Stern School of Business. The research compared firms with comparable organizational structures, noting that listed companies are prone to overstate earnings in order to increase short-term results, in many cases preferring this approach to market discipline.
The result is that institutional investors tend to invest above all in listed companies, convinced instead that market discipline makes their accounts more reliable than those of unlisted companies, as moreover most of the financial literature confirms this belief. But the study presented by Bocconi demonstrates on the contrary that if the comparison is limited to listed and non-listed companies with similar organizational structures, the accounts of unlisted companies are more reliable.
And this does not only apply to Italy. Considering a sample of 397.386 observations relating to the years 2005-2014 in 11 European countries (Belgium, Denmark, Finland, France, Germany, Italy, Norway, the Netherlands, Spain, Sweden and the United Kingdom), scholars note that all listed companies are group companies, while more than two-thirds of unlisted companies are independent companies . While in independent companies individual financial statements are used for both tax reporting and financial reporting, the consolidated financial statements of groups of companies are used only for financial reporting, which implies that independent companies have an incentive to underestimate profits to pay lower taxes, while groups do not experience this pressure.
Among unlisted companies, therefore, the quality of profits of independent companies is lower than that of groups of companies. But if instead only the corporate groups are compared, the unlisted companies present more reliable accounts, ie their valuation of non strictly monetary items is more in line with international accounting standards. Listed companies, on the other hand, as mentioned, have a strong incentive to overstate earnings to improve their short-term market performance and in the European Union this incentive is stronger than market discipline in determining the quality of accounts.
The only notable exception is that of the UK, where listed companies have more reliable accounts than unlisted ones. “The British market is the most developed in Europe – he comments Antonio Marra of Bocconi University -, with the best protection for investors. When the rules are effectively enforced, the quality of earnings improves."
