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A study of Silicon Valley firms' accounting losses

Stoyu I. Ivanov (Department of Accounting and Finance, San Jose State University, San Jose, California, USA)
Matthew Faulkner (Department of Accounting and Finance, San Jose State University, San Jose, California, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 20 September 2022

Issue publication date: 24 February 2023

201

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.

Keywords

Acknowledgements

This paper was funded by a Lucas Fellowship Research Grant. Stoyu I. Ivanov would also like to thank Gloria and Michael Chiang for the financial support. The authors are grateful to the journal editor Don T. Johnson and anonymous referees for the insightful comments and suggestions. The authors would like to thank seminar participants from the Lucas College and Graduate School of Business research seminar series at San José State University for helpful comments. Any errors are the authors' own responsibility.

Citation

Ivanov, S.I. and Faulkner, M. (2023), "A study of Silicon Valley firms' accounting losses", Managerial Finance, Vol. 49 No. 3, pp. 512-528. https://doi.org/10.1108/MF-04-2022-0176

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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