The Effects of Financial Disclosures on Value Judgments of Private Company Equity Investors

• In Event: Fair Value and Estimation

Abstract

This study examines the use of financial statement information by one particular group of private company equity investors (angel investors), as well as the effect of two financial disclosures on the judgments of such users. A highly relevant judgment context was utilized – the valuation of a private company investment target. The results suggest that the investors rely very little on financial information when relevant nonfinancial information is also available. Even so, the valuations provided by the experimental participants were affected by the financial disclosures, particularly when the disclosures contradicted the presumed underlying assumptions of the investors regarding certain attributes of the target company financial reporting. Somewhat counterintuitively, the underlying assumptions of the research participants tended towards aggressive accounting choices by the target firm and high risk associated with the revenue account. The findings of this study should prove especially meaningful to the FASB Private Company Council as they decide on alternative GAAP methods that may be allowable for private U.S. companies.

Authors

• Bryan Cataldi, Southern Illinois University - Carbondale

• Tom Downen, Southern Illinois University - Carbondale