Venture-Backed Private Equity Valuation and Financial Statement Information

51 Pages Posted: 24 Aug 2005

See all articles by Chris Armstrong

Chris Armstrong

University of Pennsylvania - Accounting Department

Tony Davila

University of Navarra - IESE Business School

George Foster

Stanford Graduate School of Business

Abstract

The relationship between (a) private and public equity market valuations and (b) financial statement information is examined for a sample of 502 venture capital backed companies from six different industries over the 1993-2003 period. Financial statement information explains a sizable component of the levels of and changes in valuation in both the Pre-IPO and Post-IPO periods. The findings support prior research for Post-IPO companies that revenues are value enhancing and costs are value diminishing. For the Pre-IPO period, we find that cost of sales; sales, marketing, general and administrative; and research and development are value enhancing - even when revenues are included in the analysis. This is consistent with costs incurred by early-stage, venture-backed companies having a strong "investment aspect" as the companies build a platform/infrastructure to grow revenue and validate their business model(s). We document the growth of early stage companies for revenues and costs in both calendar time (by round of private equity financing) and event time (relative to their eventual IPO).

Keywords: Venture-capital, valuation, value relevance, accounting

JEL Classification: M41, G12, G24

Suggested Citation

Armstrong, Chris S. and Davila, Antonio and Foster, George, Venture-Backed Private Equity Valuation and Financial Statement Information. Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=787044

Chris S. Armstrong

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Antonio Davila

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

George Foster (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-2812 (Phone)
650-725-7979 (Fax)

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