The Relevance of Biases in Management Forecasts for Default Risk Assessment and Valuation in Venture Capital Investments
Speaker
Abstract
| This study shows how venture capital investors can identify potential biases in multi-year management forecasts before an actual investment decision. By advancing a cross-sectional projection method developed by prior research and using firm-specific information in financial statements and business plans, we derive benchmarks for management revenue forecasts. With these benchmarks, we estimate forecast errors as an a priori measure of biased expectations. Using this measure for our proprietary dataset on venture-backed start-ups in Germany we find evidence of substantial upward forecast biases. We uncover that firms with large forecast errors file significantly more often bankruptcy than less biased entrepreneurs in years following the investment. However, investors seem to disregard the importance of these biases in the valuations of their investments. Overall, our results highlight the implications of excessive optimism and overconfidence in an entrepreneurial environment and emphasize the relevance of accounting information and business plans for venture capital investment decisions. |
| Contact information: |
| Paulo Perego |
