A study of Silicon Valley firms' accounting losses

Publication Date

2-24-2023

Document Type

Article

Publication Title

Managerial Finance

Volume

49

Issue

3

DOI

10.1108/MF-04-2022-0176

First Page

512

Last Page

528

Abstract

Purpose: Small firms, which represent much of the Silicon Valley region, tend to experience losses due to their small scale, small customer base and lack of diversification. The authors 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: The authors use methodology developed in prior literature to examine Silicon Valley and non-Silicon Valley firms' and their behavior when facing losses and the factors, which might play a role in their valuation. The authors focus particularly on earnings and accounting conservatism. Accounting conservatism captures how fast firms record losses relative to gains. The faster losses are recognized than gains the more accounting conservatism is exhibited. The authors examine the seemingly unrelated estimation of differences in means for our independent variables of interest across the two samples of Silicon Valley and non-Silicon Valley firms, both earnings and accounting conservatism. The authors use matched sample analysis of these firms based on four digit SIC code, size and date. In robustness, the authors run a more in-depth propensity score matched sample analysis.
Findings: The authors document that market values of Silicon Valley firms with accounting losses are affected less by negative earnings than other firms with accounting losses in the United States outside of the Silicon Valley region, noting the “lose big, win bigger” sentiment of Silicon Valley. Additionally, the authors document that accounting conservatism does play a role in influencing valuations of companies with accounting losses both in Silicon Valley and the rest of the United States, marginally more for Silicon Valley firms.
Originality/value:
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.

Funding Number

NERC2021-B008

Funding Sponsor

National Natural Science Foundation of China

Keywords

Accounting conservatism, Loss firms, Small firms

Department

Accounting and Finance

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