On the Importance of Accounting Information in Early-Stage Financing

Abstract

This paper asks whether available accounting information is important in early-stage financing. We use detailed administrative records from Norway to build a measure of a startup's ex ante innovation potential before it receives financing. This approach allows us to look beyond the set of venture-backed startups to circumvent the endogenous demand for accounting information. The lagged book value of equity, disaggregated into earnings and contributed capital, captures between 27% and 34% of the total variation in valuations across financing rounds. Current earnings not only aggregate the underlying non-financial firm characteristics but also contain incremental information. The latter relates more to the financing decision and amount than to the implied valuations per se. Overall, our findings speak to the importance of accounting information for reducing information asymmetries even in highly uncertain settings, in which investing based on ``gut feeling" may be the norm.

Keywords: entrepreneurship; accounting information; venture capital; early-stage financing; earnings; value relevance

JEL Classification: G11, G23, G24, G32, M41