Ilanit Gavious

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

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

Female directors and earnings management in high‐technology firms

14 to

Accounting Software Assets: A Valuation Model for Software.

18 million experiences a dollar value decrease in enterprise value due to not hiring a Big 4 auditor ranging from

Market valuations of start-up ventures around the technology bubble

2.0 to

The Relationship Between the Management of Book Income and Taxable Income Under a Moderate Level of Book-Tax Conformity

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.

Tax Claims, Government Priority, Absolute Priority and the Resolution of Financial Distress

Purpose – This study, based on a merger of gender and accounting theories, aims to explore whether and how earnings management is affected by the presence of female directors on the board of directors and on the audit committee.Design/methodology/approach – The study employs both a univariate and multivariate analysis approach to explore the relation between female directors and earnings management in high‐technology firms. In the analysis, two contemporary ex‐post measures of earnings management, discretionary accruals and nonoperating accruals, as well as two ex‐ante measures of earnings management, Big4 auditor and financial leverage are applied.Findings – The paper finds evidence for a negative relation between the presence of female directors and earnings management. The findings indicate that accounting aggressiveness is affected by the proportion of women on the board of directors as well as on the audit committee. Furthermore, the paper find evidences indicating that earnings management is lower w...

Changes in the value implications of compensation costs throughout the economic cycle: an examination of high-tech versus low-tech industries

Enterprise Information Technology Systems are major corporate assets upon which corporate management and operations are heavily dependent. Current accounting standards for the treatment of these assets have not kept pace with advances in technology, such as models for creating and evolving IT. Capitalizable costs according to the standards are principally primary development costs and exclude system evolution. This weakness of the standards creates a disproportionate downward bias in the book value of software and in current earnings, as costs incurred for on‐going systems evolution is five to twenty times the costs incurred for first release. We present a quantitative valuation model for IT systems based upon engineering measurements of software that allow the fair value of software to be based on all costs incurred by the system. Costs are collected by an automatic tool and stored in an inventory system of enterprise software assets. To total costs is added the effect of each individual modules relativ...

Under-Investments in Innovative SMEs: The Effect of Entrepreneurial Cognitive Bias

This study explores whether, and how, the relevance of financial information for valuation of start-up ventures changed during the period of a technology bubble and the fluctuations that occurred in the capital market after the bubble burst. We find that since the bubble burst, there has been a learning curve and a period of market adjustment. Specifically, during the time of the bubble the market did not rely on accounting information with respect to the valuation of start-ups. After the bubble burst the market became overly conservative, relying predominantly on accepted accounting fundamentals – book value of equity and earnings. In later years, as the process stabilized, the market gradually moved away from these measures and began relying on growth in sales, which may serve as an indication of technological feasibility and the venture’s market potential. The study also explores the effect of market cycles on investor reliance on multiples. We find that, despite over/underpricing effects when using the benchmark multiples of comparable firms in valuating start-ups, these remain the accepted tool, probably due to the absence of alternative valuation methods.

Accounting Software Assets

We find evidence suggesting that taxable income management is not related to book income management in firms operating under a moderate level of book-tax conformity. For a sample of Israeli firms that the tax authorities determined had understated their earnings to avoid taxes, we do not find evidence of an overstatement of book earnings. Notably, public firms do not differ from private firms in this regard. Using a control sample of firms that were not subject to tax audits, we validate that self-selection does not affect our inferences. Given Israel’s unique “intermediate” level of book-tax conformity, an important practical contribution of the findings is in shedding more light on the question of the need for a substantial transition from nonconformity to full alignment in countries with large book-tax gaps (such as the United States). Our results showing that tax-avoiding firms in Israel, public and private alike, avoid book income management even if areas of book-tax nonconformity allow them to do so imply that a reduction in the divergence between the tax and the accounting rules may suffice to reduce managers’ opportunistic (reporting) behavior.

Alternative perspectives to deal with auditors’ agency problem

We present a model of an insolvent firm that may take advantage of a ‘soft-touch’ government creditor in order to buy time before filing for reorganization, behaviour we refer to as ‘claims substitution.’ Parameters in the model reflect the enforcement of absolute priority and government priority in bankruptcy. We show that deviations from absolute priority reduce the incentive for claims substitution. We also show that strict government priority is economically efficient. We discuss the implications of our findings for bankruptcy law reform, especially with respect to the priority of tax claims in bankruptcy and the enforcement of absolute priority.