While it is reasonable to believe that raising capital in public markets creates strong incentives to provide earnings that reflect economic performance, we recognize that there are many tradeoffs and potentially countervailing effects. For instance, Leuz et al. (2003) argue that private control benefits and expropriation from outside investors create hiding incentives for corporate insiders. That is, public firms with agency problems between controlling insiders and outside investors may mask firm performance by managing reported earnings to prevent outsider intervention. But similar incentives can arise for private firms, which rely heavily on debt financing from banks and use financial statements to inform banks about their performance
