The prediction of future cash flow for UK private companies

Abstract

UK private companies follow less stringent reporting standards than public ones. Despite extensive research on public companies’ financial reporting, little has been done for private firms, especially in the UK. We conducted prediction error tests on about 1.5 million observations on UK private companies from 2006–2022, distinguishing between the different classes of private companies: micro, small, medium-sized, and large. We found that errors in predicting future cash flow one period ahead for micro and small companies were only slightly larger than those of public companies. For medium-sized and large private companies, the errors were more than double, suggesting less informative disclosures. These results are robust for predicting beyond the next period and for times when financial distress is high. The impact of regulatory revisions for private companies in 2016, based on International Financial Reporting Standards for Small and Medium-sized Companies, is minor.