Angel Investor Value Judgments and the Effects of Accounting Disclosures*

Advances in Accounting Behavioral Research

ISBN: 978-1-83867-402-1, eISBN: 978-1-83867-401-4

ISSN: 1475-1488

Publication date: 23 July 2020

Abstract

Private company investors operate in unique environments. Seed equity investors, which generally include venture capitalists and angel investors, often have the particularly unusual role of becoming involved in the oversight of the investee company. This continuing involvement with the investee firm introduces conflicting interests: the desire to maximize the profit from the investment, but also the desire to maintain a positive relationship with the entrepreneur(s) (consistent with the theory of upper echelons/strategic management). We discuss in detail this unusual investment context and the role that accounting disclosures can have in this environment. We predict that accounting disclosures can influence the tradeoff between the profit motive and the relationship motive. Using 64 experienced angel investors as participants in a realistic experimental setting, we find that disclosures indicating conservatively biased accounting choice and lower account risk (variance) lead to angels increasing the valuation of the target firm and forgoing higher profits. Increasing the valuation serves to foster the relationship with the entrepreneur(s). Our findings have implications for entrepreneurs making choices about discretionary disclosures and for standard setters; we also inform theory related to overcoming anchoring.

Keywords

Acknowledgements

Acknowledgments

This chapter is based on the first author's dissertation completed at Southern Illinois University, under the guidance of the second author and other dissertation committee members to whom considerable gratitude is extended: Ed O'Donnell, Cheryl Burke Jarvis, Marcus Odom, Marc Ortegren, and Jon Mote. This chapter has also benefited from many helpful comments provided by Khondkar Karim (editor), an anonymous reviewer, Noel Addy, Alisa Brink, Steve Buchheit, Dan Cataldi, Derek Dalton, Kirsten Fanning, Jeff Hales, Becky Hyde, Brad Trinkle, Lisa Victoravich, and Michael Young, and workshop participants at Babson College, Bradley University, Butler University, Coastal Carolina University, Mississippi State University, Murray State University, and University of North Carolina Wilmington. Tremendous appreciation is also owed to the members of the numerous angel investor groups who agreed to participate in this research.

Citation

Cataldi, B. and Downen, T. (2020), "Angel Investor Value Judgments and the Effects of Accounting Disclosures* ", Karim, K.E. (Ed.) Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 23), Emerald Publishing Limited, pp. 47-75. https://doi.org/10.1108/S1475-148820200000023003

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