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

When a private company sells without a Big Four auditor, it leaves millions on the table. That's not a hypothesis — it's a measured result. And it raises a question that cuts to the heart of how deals actually get done: when a business owner hires Deloitte, PwC, or KPMG to audit the books, what are they really buying? Not just accounting services. They're buying credibility. This paper by De Franco, Gavious, Jin, and Richardson puts a dollar figure on exactly what that credibility is worth. Start with the baseline problem. Private companies routinely sell for less than comparable public firms — a gap researchers call the private company discount, or PCD. Koeplin, Sarin, and Shapiro, using eighty-four matched pairs of private and public acquisitions from 1984 through 1998, estimated the PCD at around twenty percent on an enterprise value to EBITDA basis. Officer, working with unlisted targets from 1979 to 2003, landed at seventeen to eighteen percent across both EBITDA and sales multiples. Those numbers are already sobering. But De Franco and colleagues, using multivariate methods that control for size, growth, and industry conditions, find the discount is even larger. In raw comparisons, the mean public enterprise value to EBITDA multiple is eleven point eleven, versus seven point forty-one for private firms — a raw gap of thirty-three percent. When the authors use predicted multiples from regression models, the private company discount on EBITDA multiples rises to nearly forty percent for stock purchases. In dollar terms, for a representative private seller with a median enterprise value somewhere between fourteen and eighteen million dollars, not being a public company costs roughly two to five million dollars off the sale price. A reconciliation exercise explains the gap from prior studies: the matched-pair approach Officer used produces PCDs of around twenty-one percent on the same data, while the multivariate method on the same observations yields PCDs above forty percent. The method matters enormously. Why the discount at all? Private firms face no regulatory reporting obligations, no SEC scrutiny, and no analyst coverage. Their accounting systems tend to be less sophisticated, their internal controls weaker, and their financials less reliable. Buyers know this. That asymmetric information — the buyer knowing less than the seller about the true state of the business — gets priced in as a discount. And that's where the auditor enters the picture. The central hypothesis of the paper is clean: hiring a Big Four auditor raises the proceeds of a private firm sale. The logic runs in a straight line. A higher-quality audit makes financial statements more trustworthy. More trustworthy statements reduce the buyer's information risk. Lower information risk means a smaller discount demanded at closing, leading to higher proceeds for the seller. This logic had already been confirmed in public markets. Khurana and Raman found that Big Four audits were associated with a thirty basis point reduction in the cost of equity for public firms. Mansi, Maxwell, and Miller showed Big Four audited public firms paid sixty-three basis points less on their debt. Willenborg documented that reputable auditors reduce IPO underpricing. Francis, Maydew, and Sparks showed that large auditors constrain income-increasing discretionary accruals — the accounting maneuver where companies massage earnings upward. The private company setting, the paper argues, is where these effects should matter most, precisely because the information environment is so much thinner. There's no offering document, no regulatory backstop, and no pre-sale governance investment. The auditor's credibility is often the only independent signal the buyer has. To test this, the authors assemble three thousand one hundred ninety-six acquisition observations — six hundred seventy-three private stock sales, two hundred seventy-four private asset sales, and two thousand two hundred forty-nine public stock sales — and build their analysis around two valuation multiples: enterprise value relative to EBITDA, and enterprise value relative to sales. They compare private targets to contemporaneous public firms in the same two-digit industry and year, adjusting variables by subtracting industry-year medians so the benchmarks are apples to apples. Controls cover size, sales growth, research and development intensity, and profit margin. The empirical strategy runs two parallel tracks. First, a pooled regression of public and private firms together, with a private indicator, a Big Four indicator, and a Big Four times private interaction term. This directly estimates how auditor choice shifts multiples after controlling for everything else. Second — and this is where the methodology gets elegant — a Heckman two-stage selection model applied only to private firms. The problem is that firms choosing Big Four auditors are not randomly selected; larger, better-governed firms are more likely to hire them anyway. The Heckman correction builds a first-stage model predicting which private firms hire Big Four auditors, extracts the inverse Mills ratio from that model, and includes it in the second-stage valuation regression to separate genuine auditor effects from selection. The two approaches triangulate from different angles. They arrive at the same place. The results are blunt. Private firms without a Big Four auditor receive substantially less for their companies. In the pooled regressions, the Big Four coefficient is negative on the inverse multiples — meaning Big Four audited firms command higher enterprise value multiples. In the private firm only regressions with Heckman correction, the dollar value decrease from not hiring a Big Four auditor ranges from three point nine million to five point two million dollars for stock purchases, and two point six million to three point one million dollars for asset purchases. Even the more conservative pooled sample estimates put the shortfall between two point zero and three point two million dollars for stock purchases. In percentage terms, stock purchase targets without a Big Four auditor show discounts of around twenty percent on EBITDA multiples and nearly thirty-five percent on sales multiples. These results survive a battery of robustness checks. Rank regressions and piecewise linear — or spline — regressions, which make no assumptions about the functional form of the relationship, produce non-Big Four auditor discounts ranging from about eleven to forty percent depending on specification. The discounts do not appear to be a statistical artifact. And critically, there's an earnings quality dimension that goes beyond perception. For private stock purchase sellers, mean total accruals are negative zero point zero two two for non-Big Four firms and negative zero point zero six four for Big Four firms — a statistically significant difference. Multivariate accrual regressions show Big Four firms carry lower accruals but no difference in operating cash flows. That's exactly the fingerprint of conservative accounting: the auditor is constraining upward earnings management, not just lending their name to whatever the firm reports. This matters because it means part of what Big Four auditors are doing is real — they're actually changing the financial statements. To ground the quantitative findings in deal room reality, the authors convened a practitioner roundtable — conversations with accountants, advisors, and merger and acquisition professionals who work on private company sales. What they heard was consistent with the data. Big Four audits make due diligence cleaner; buyers encounter fewer surprises at closing and are less likely to demand last-minute price adjustments. Big Four engagement correlates with stronger internal controls, better-qualified accounting personnel, and the presence of other high-quality advisors like investment banks. Several practitioners noted that some buyers simply won't consider firms with poor accounting systems — which means the number of potential bidders itself is affected by auditor choice. Fewer bidders means less competition for the deal, which means lower prices. The practitioners also raised honest caveats. Firms that hire Big Four auditors may be better run in ways the regression controls don't fully capture. And the proceeds estimates De Franco and colleagues report don't include the costs of hiring a Big Four auditor in the first place — higher fees, upgraded information systems, and more qualified internal staff. A small business owner has to weigh a three to five million dollar boost in sale proceeds against real upfront costs. What the paper ultimately demonstrates is that a significant piece of the private company discount traces to information quality — and that audit choice is a lever sellers can pull. The discount is not purely about illiquidity or the hassle of buying a private firm. It's about whether the buyer can trust what’s in the financials. Trust, it turns out, has a price. And for a private company owner planning an exit, the data suggest that failing to buy audited credibility can cost far more than the audit itself. This lecture was created by ennepō. Go to https://ennepo.ai to Discover, Create and Follow the latest research in your field. Read when you can. Listen when you want to.