The Value Relevance of Financial Statements in Private Equity Markets

Abstract

This study explores the value relevance of financial statements in private equity markets, and compares the value relevance of financial statements to that of non-financial statement information within and across private and public equity markets. For a sample of U.S. biotechnology firms, I find that financial statements are highly value relevant in private equity markets, and that the signs of the associations between equity values and financial statement data are similar to those in public equity markets, despite significant structural differences between the two markets. I also find that the value relevance of financial statements increases as firms mature, which I attribute to financial statements capturing the increasing intensity of assets in place relative to future investment options as firms mature. I also observe that the value relevance of non-financial statement information decreases as firms mature. In a dynamic sense, financial statements and non-financial statement information of biotech companies are information substitutes in valuation, not complements.