Do Public Financial Statements Influence Venture Capital and Private Equity Financing?

We study whether private firm public financial statements influence the probability of raising venture capital (VC) and private equity (PE) financing. In particular, we propose that private firms’ public financial statements can help the VC/PE search process by providing a less costly screening tool to identify potential targets at the pre-investment stage. Using two complementary settings, we find that an increase in financial statement availability is associated with an increase in the probability of a private firm obtaining VC/PE financing. We also show that our findings generalize to acquisitions of private firms, which also feature significant search costs. Our evidence highlights the importance of public financial statements in the decision making of private investors in the early stages of a private firm’s financing process, and suggests a search cost-based channel for the effects.