Resumen de The economics of financial information in young firms
In this thesis I explore the use of accounting information to mitigate the severe information asymmetries existing between young firms and capital providers. In particular, this dissertation examines the role of accounting information in young firms’ financing activities and disclosure choices. Overall, my research has been influenced by the work of scholars such as Cassar, Davila, Foster or Hand among others, who brought together the fields of accounting and entrepreneurship in the early 2000s. The context featuring the dot-com bubble explosion propelled this line of research, which continues to be relevant due to new technological advances (e.g. big data or blockchain) and new forms of financing (e.g. crowdlending or Initial Coin Offerings) that are many times initiated in these small young companies. This preface places the above research line into the three chapters that form my dissertation, and puts them in a broader academic, intellectual and even personal context.
In chapter 1 of the dissertation I explore debt as one of the information channels that young firms use to attract early stage equity investments. This chapter is a joint work with Mircea Epure and follows from my master thesis. We document a positive association between debt, and in particular business debt, and equity financing. We posit that outside investors can attempt to identify when an effective governance is already in place, and see debt as a governance mechanism that tightens management discretion over future cash flows, directs entrepreneurs towards a more professional market oriented management, and can ultimately shift the control of firm management if conditions require it. Altogether, we argue that debt becomes more than a simple financing tool towards firm growth, and acts as a mechanism that raises accountability and transmits valuable information to outside investors.
While Chapter 1 implicitly assumes financial and non-financial information disclosure to investors, it does not explicitly analyze firm disclosure. In chapter 2 (my job market paper), I use the IPO setting to study investor’s reaction to a reduction in the amount of information conveyed to the market. This work was initiated during my stay at the University of North Carolina and has benefited from talks with Wayne Landsman and Javier Gómez, my second supervisor, upon returning to Barcelona. In this chapter, I exploit a recent US disclosure deregulation (the JOBS Act) to analyze whether accounting information remains as informative after relaxing mandatory disclosure requirements. Results show that after the Act, only those firms that reduce their public disclosure experience a decline in the market reaction to their earnings announcement event. I document that this decline does not only originate from the reduced mandatory disclosure, but also from an increased voluntary disclosure in the months preceding the earnings announcement. This result provides evidence of a substitution effect from mandatory to voluntary disclosure, which may give insights to regulators on the ongoing consideration of reducing disclosure requirements.
Chapter 3 turns back to the information channels young firms use in early stage financing activities. In collaboration with Antonio Davila, we argue that perceptions of entrepreneurs’ personality traits can be one vehicle through which early stage investors can ex-ante integrate entrepreneurs’ behaviors and actions. We study how investor perceptions of entrepreneurs’ personality traits relate to firm reporting practices (i.e. financial projections errors and firm overvaluation) and economic outcomes more generally (firm survival and actual equity investment decisions). In particular, we show that presence (a component capturing passion, dominance and openness in gestures) and attractiveness correlate with higher financial forecast errors, higher firm overvaluations, lower rates of survival, yet higher likelihood of receiving outside funding. We posit that understanding the effects of personal characteristics in a timely manner can be useful to early stage investors in the assessment of investment opportunities, deal structure (e.g. contract design), and ex-post monitoring. Altogether, our study complements the set of available ex-ante information that early stage investors can use to mitigate potential business model uncertainties and (ex-ante) information problems. This project developed alongside the other two chapters, as I devoted extensive time to the manual collection of data from the IESE Business Angels Network, to whom I am grateful for sharing their information.
