Accounting and financial reporting for development-stage enterprises: An empirical investigation of SFAS No. 7.

Abstract

The empirical results are inconsistent with investors finding the cumulative reporting required by SFAS 7 to be useful. Neither summary nor component measures of cumulative earnings have any significant correlation with equity values. The results are consistent with investors finding the book value of equity (or assets in place) and cash to be relevant for equity valuation. A comparison of the relevance of earnings for equity values during and after the development stage finds no significant difference between the two time periods. Overall, investors appear to use some accounting information for their valuations of development stage firms.

The primary purpose of this study is to investigate the value-relevance of the financial reporting required by SFAS 7 for development stage enterprises. These firms have no significant operations or revenues, but they incur substantial pre-operating costs. SFAS 7 requires development stage firms to report a cumulative, life-to-date total for each line-item of the income and cash flow statements in addition to the traditional comparative reporting. The FASB says "the cumulative information required under SFAS 7 will provide useful information about the activities of development stage firms." However, no empirical evidence exists to support the FASB's claim. This study generates empirical evidence to help evaluate the value-relevance of the cumulative disclosures required by SFAS 7. The study also compares the value-relevance of accounting information during the development and operating stages. Descriptive statistics are also included.