The Value Relevance of Financial Statements in the Venture Capital Market

Abstract

This study examines the value relevance of financial statement data and non-financial statement information within and across the pre-IPO venture capital and post-IPO public equity markets. For a sample of U.S. biotechnology firms, I find that financial statements are highly value relevant in the venture capital market, and that the signs of the associations between equity values and financial statement data in that market are similar to those in the public equity market, despite significant structural differences between the two. I also find that the value relevance of financial statements generally increases as firms mature, consistent with financial statements capturing the increasing intensity of assets-in-place relative to future investment options. In contrast, the value relevance of non-financial statement information decreases as firms mature, indicating that in a dynamic sense, financial statements and non-financial statement information of venture-backed pre-IPO biotech companies are information substitutes in valuation, not complements.

Keywords: Biotechnology, financial statements, firm maturity, investment opportunities, non-financial statement information, private equity, value relevance, venture capital

JEL Classification: G12, M13, M41