Do Private Company Targets that Hire Big4 Auditors Receive Higher Proceeds?

Posted: 17 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: July 14, 2010

Abstract

This study documents a substantial impact of Big4 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 Big4 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 Big4 auditor merely standing in for firm risk as captured by innate accrual quality characteristics. There is modest evidence that Big4 auditors constrain income-increasing accruals, consistent with the notion that hiring Big4 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 matched-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 Big4 Auditors Receive Higher Proceeds? (July 14, 2010). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1640522

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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