Do Private Company Targets that Hire Big 4 Auditors Receive Higher Proceeds?

54 Pages Posted: 16 Jul 2010

See all articles by Gus De Franco

Gus De Franco

Tulane University - A.B. Freeman School of Business

Ilanit Gavious

Ben-Gurion University of the Negev

Gordon D. Richardson

University of Toronto - Rotman School of Management

Justin Yiqiang Jin

McMaster University - DeGroote School of Business

Date Written: June 22, 2009

Abstract

This study documents a substantial impact of Big 4 auditor choice on the sale proceeds of controlling interests of U.S. private firms. A representative private stock-purchase company with median enterprise value ranging from $14 to $18 million experiences a dollar value decrease in enterprise value due to not hiring a Big 4 auditor ranging from $2.0 to $5.2 million. We obtain a similar magnitude of "deal value reduction" for private company sales structured as asset purchases. Our results provide a partial explanation for the private company discount (PCD), one related to the information quality facing the buyer rather than the standard reduced-liquidity argument. The estimates are robust to controlling for auditor self-selection characteristics and non-linear effects, and our descriptive evidence is inconsistent with the presence of a Big 4 auditor merely standing in for firm risk as captured by innate accrual quality characteristics. There is modest evidence that Big 4 auditors constrain income-increasing accruals, consistent with the notion that hiring Big 4 audit firms leads to higher quality accruals. In addition, we note that our PCD estimates derived from a multivariate approach are higher than that in the extant literature, which uses a match-pair method.

Keywords: Valuation, Auditor, Private Companies, Private Company Discount

JEL Classification: M41, M42

Suggested Citation

De Franco, Gus and Gavious, Ilanit and Richardson, Gordon D. and Jin, Justin Y., Do Private Company Targets that Hire Big 4 Auditors Receive Higher Proceeds? (June 22, 2009). Available at SSRN: https://ssrn.com/abstract=1640496 or http://dx.doi.org/10.2139/ssrn.1640496

Gus De Franco (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Ilanit Gavious

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
Israel

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

Justin Y. Jin

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext. 26194 (Phone)
905-521-8995 (Fax)

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