A Study of Silicon Valley Firms' Accounting Losses

Abstract

Purpose-Small firms, which are prominently represented in the Silicon Valley region, tend to experience more losses than their bigger rivals due to their small scale, small customer base and lack of diversification. We study the impact of accounting conservatism and losses on firm value and as such this study is an appropriate addition to this growing field of financial management. 

Design/methodology/approach-Accounting conservatism captures how fast firms record losses relative to gains. The faster losses are recognized than gains the more accounting conservatism is exhibited, i.e. probable losses are recognized when discovered whereas gains are recognized when entirely realized. 

Findings-We find that market values of Silicon Valley firms with losses do seem to be affected by earnings, that other factors besides earnings affect their values and also that accounting conservatism does seem to play a role in valuation of loss firms both in Silicon Valley and the rest of the US. Surprisingly, we document that both losses and accounting conservatism, contrary to expectations, have smaller influence on Silicon Valley small firms' market values than in the rest of the US small firms' market values. 

Originality-This study would be of interest to fund managers who need to consider smaller firms for inclusion in their portfolios. A lot of small firms have experienced losses ever since going public, especially Silicon Valley start-up firms.

Keywords: Loss Firms, Small Firms, Accounting Conservatism JEL Classification G12, M41

JEL Classification: G12, M41