Venture-backed Private Equity Valuation and Financial Statement Information

Armstrong, Chris; Dávila, Antonio; Foster, George

doi:10.1007/s11142-006-6398-8

Cited by 102 publications

(81 citation statements)

References 28 publications

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“…In 10 Some very high one-and two-year-ahead forecasted growth rates are in part due to companies that have very low revenues in the denominator of the growth rate calculation. 11 The dominance of reported losses in our sample echoes the results reported by Armstrong, Dávila and Foster (2006). They report that for a sample of 502 venture-backed companies that went public, the 10 th through 70 th percentiles of net income is always negative in each of the three years prior to the IPO, the year of the IPO, and the three years immediately following the IPO.…”

supporting

confidence: 74%

“…20 This is likely not the case in that VentureOne obtains approximately three-quarters of its actual, historical data from firms' IPO filing documents. 21 In contrast, the fraction of all venture-backed firms that go public is only 10% -15% (Armstrong, Dávila and Foster, 2006). Since firms that go IPO are on average more successful than those that do not, this selection problem in our setting will likely lead to upward-biased historicallygrounded conditional predictions of revenues, expenses and net income.…”

Section: Strengths and Weaknesses Of The Historically-grounded Conditmentioning

confidence: 96%

“…Finally, our study adds to the small but growing literature in accounting that focuses on the economics of young companies, particularly those backed by venture capital (Dávila, Foster and Gupta, 2003;Beuselinck, Deloof and Manigart, 2005;Dávila, 2005;Hand, 2005Hand, , 2006Armstrong, Dávila and Foster, 2006;andDávila andFoster, 2005, 2006). Venture-backed firms are becoming increasingly important in the modern economy (Gompers and Lerner, 2000;National Venture Capital Association, 2004): Microsoft, Genentech, Apple Computer and Google among many others were once small startups whose ultra-rapid growth has significantly affected the U.S. and worldwide economies.…”

Section: Introductionmentioning

confidence: 92%

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Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies

et al. 2007

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This paper studies the properties and determinants of managers' multi-year financial forecasts. Using one-to five-year-ahead forecasts reported by private venture-backed firms, we ask whether, by how much, and why biases in managers' forecasts of revenues, expenses and profits depend on the forecasting horizon and the verifiability of assets. We find that profitability forecasts contain a strategic component, in that [1] one-yearahead revenue (expense) forecasts are slightly and asymmetrically pessimistic (optimistic), while five-yearahead forecasts are hugely and asymmetrically optimistic (pessimistic); and [2] biases in revenue and expense forecasts are larger, the harder to verify or more intangible-intensive are firms' assets. AbstractThis paper studies the properties and determinants of managers' multi-year financial forecasts. We ask whether, by how much, and why biases in managers' forecasts of revenues, expenses and profits depend on the forecasting horizon and the verifiability of firms' assets. Since public companies rarely divulge their internal multi-year financial projections to outsiders, we use the one-to five-year-ahead management forecasts reported by private venture-backed firms. We also introduce a new method of measuring financial forecast bias that compares forecasts to historically-grounded conditional projections, rather than to ex-post actuals. We find that on average, managers' forecasts of firm profitability and revenues are optimistic, especially as the forecast horizon increases to five-years-ahead. Managers' expense forecasts become more pessimistic as the forecast horizon rises, most likely arising from the need on managers' part to respect 'reasonable' relations between revenues and expenses. We conclude that profitability forecasts contain a strategic component, in that: [1] One-year-ahead revenue (expense) forecasts are slightly and asymmetrically pessimistic (optimistic), and five-year-ahead forecasts are hugely and asymmetrically optimistic (pessimistic); and [2] Biases in revenue and expense forecasts are larger the harder to verify or more intangible-intensive are firms' assets.JEL classifications: G24, M13, M41.

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supporting

confidence: 74%

Section: Strengths and Weaknesses Of The Historically-grounded Conditmentioning

confidence: 96%

Section: Introductionmentioning

confidence: 92%

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Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies

et al. 2007

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“…This might partially explain why PE investors have a positive certifying effect on their portfolio companies beyond the mere provision of financing (Gompers and Lerner, 1999). Despite the economic importance of this topic, only a few studies have so far looked at the properties and value relevance of financial reporting in PE backed firms (Armstrong et al, 2006;Beuselinck et al, 2004;Hand, 2005). The present paper adds to this stream of research by acknowledging that not only the mere fact of having a PE investor as shareholder influences the quality of the accounting information, but that also the importance of its ownership stake matters.…”

Section: Introductionmentioning

confidence: 99%

Financial Reporting Quality in Private Equity Backed Companies: The Impact of Ownership Concentration

Beuselinck

Manigart

2007

Small Bus Econ

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ABSTRACT. We empirically show on a sample of 270 unquoted, private equity backed companies that the shareholder structure of private companies impacts the quality of their publicly available accounting information. More precisely, companies in which private equity (PE) investors have a high equity stake produce lower quality accounting information than companies in which PE investors have a low equity stake, after controlling for factors like company size and age. We explain our findings by arguing that PE investors with low equity stakes have a higher need for high quality accounting information whereas PE investors with high equity stakes have other means to closely monitor their portfolio companies.

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“…We therefore control for several owner characteristics in our analysis. Second, financial information can play a substitution or complementary role in early stage private equity transactions (Armstrong, Davila, and Foster, 2006;Hand, 2005;Sievers, Mokwa, and Keienburg, 2013).…”

Section: Outside Equity In Start-up Firmsmentioning

confidence: 99%

Information Asymmetry Reduction in Opaque Contexts: Evidence From Debt and Outside Equity Financing in Early Stage Firms

Epure

Guasch

2016

SSRN Journal

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This study analyzes the relationship between debt and outside equity investments in early stage firms. The existing evidence on this relationship is scarce and inconclusive, mostly due to the pervasive opaqueness of new ventures. We argue that debt and its usage can be valuable signals for outside investors facing severe information asymmetries. In addition, we examine how personal and business debt could signal different information to outside investors. Using panel data on new ventures in the US from the Kauffman Firm Survey, we find evidence consistent with our arguments. We reveal that debt, and particularly business debt, is positively related to outside equity investments, especially in times of economic distress. We posit that start-ups with higher levels of business debt can send more credible signals to capital markets, and identify cash holdings and the firm-bank relationship as possible information channels for outside investors.

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Venture-backed Private Equity Valuation and Financial Statement Information

Cited by 102 publications

References 28 publications

Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies

Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies

Financial Reporting Quality in Private Equity Backed Companies: The Impact of Ownership Concentration

Information Asymmetry Reduction in Opaque Contexts: Evidence From Debt and Outside Equity Financing in Early Stage Firms

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