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

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