An examination of supplemental disclosure requirements for development stage enterprises

Under U.S. GAAP, development stage enterprises are required to report cumulative (i.e., inception-to-date) totals for each line item in the statements of income, cash flow, and stockholders' equity. The purpose of this study is to investigate whether additional income statement disclosures provide value-relevant information to investors. Based on an empirical analysis of a sample of publicly traded development stage enterprises, we find that historical income statement components do not exhibit a significant association with equity values after controlling for the effects of non-financial information and current accounting data. In terms of current accounting data, book value of equity (primarily contributed capital), cash holdings, and R&D expense appear to be most useful for valuation purposes. These results imply that supplemental disclosure requirements geared toward providing qualitative information about development stage firms may prove more informative than providing cumulative financial statement data.