Disclosure Frequency Induced Earnings-Cash Flow Conflict and the Decision to be Public

We examine whether disclosure frequency induced earnings-cash flow conflict influences the types of firms that choose to be public. Using the length of the cash conversion cycle to proxy for the disclosure frequency induced conflict between short-term reported earnings and total cash flows, we find that in the United States, where mandatory disclosure is required quarterly, the proportion of public firms decreases with the length of the industry’s cash conversion cycle when cash conversion cycles are longer than one quarter. Furthermore, we find that when the reporting frequency changed from semi-annual to quarterly in UK, the proportion of UK public firms from industries whose cash conversion cycles are between 90 days and 180 days decreased significantly, compared to their US counterparts. Our results shed light on the ongoing debate on the frequency of mandatory disclosure.