Accounting Information in Early-Stage Financing

We examine whether and how mandatory financial statements are reflected in early-stage equity financing. Using population-wide Norwegian administrative data, we link standardized financial statement filings to equity transaction records and estimate a three-equation system that jointly models selection into financing, capital allocation, and valuation, while accounting for selection into observed rounds and correlated shocks across outcomes. Earnings improve system fit by roughly 5%, with comparable incremental contributions from cash flow from operations and, conditional on cash flow, accrual partitions. Accounting information is not crowded out by non-financial signals: prior financing history and credit ratings add substantial explanatory power, yet accounting variables retain incremental explanatory power conditional on a richer non-financial information set, pointing to complementarity rather than substitution. To examine the role of verification, we exploit a regulatory shift from mandatory to voluntary audit, holding production and dissemination fixed while making verification discretionary. Firms appear to sort around the audit-eligibility threshold, and voluntary audit choice becomes strongly associated with subsequent equity financing, even as accounting information retains explanatory power across verification regimes. The audit-associated financing premium is not driven by stronger investor reliance on audited numbers, nor does the evidence support signaling as the dominant mechanism; the pattern is most consistent with a monitoring and governance role of voluntary audit. Taken together, the results show that standardized accounting information is reflected in financing outcomes even in opaque early-stage settings and inform ongoing debates over the content and assurance of mandated private-firm reporting.

Duke Scholars

Author David T. Robinson Fuqua School of Business