Accuracy in Private Company Financial Reporting for Prediction of Future Cash Flow

Abstract

UK and European private companies follow less stringent reporting standards compared to public ones, with simpler measurement rules. While extensive research focuses on public companies, the impact of these standards on private firms remains underexplored. Our study examines prediction errors using approximately 1.5 million observations of UK private companies for the period from 2006 to 2022, covering a wide range of economic conditions. We distinguish between micro-sized, small, medium-sized, and large private companies. For micro- and small firms, prediction errors for future cash flow are only slightly larger than those of public companies, supporting the European Union 2013 directive to minimize reporting burdens on small businesses. However, medium-sized and large private companies exhibit errors more than double those of public firms, indicating less informative disclosures. These results are robust in predicting beyond the next period and in times when financial distress is high, and therefore will be useful to both investors and creditors.