The Value Relevance of Financial Statements within and Across Private and Public Equity Markets

Abstract

This study finds that the value relevance of financial statements follows a ‘sawtooth’ pattern as firms mature within and across private and public equity markets. Specifically, I show that the strength of the associations between the equity values and financial statements of U.S. biotech companies rises as firms mature toward an IPO, falls at the IPO, and increases again after the IPO. I argue that this pattern is due to underlying sawtooth dynamics in firms’ investment opportunity sets and in the financial sophistication of the marginal investor in firms’ stock. I also find that the financial statements of U.S. biotech companies are value relevant in surprisingly similar ways in private as compared to public markets. In each market, equity values are positively related to RD are unrelated to revenues and SGA and are negatively related to long-term debt. And in each market, financial statements explain over one-third of the cross-sectional variance in equity values.