Professor John Hand

John Hand is systematically taking the mystery out of young, venture-backed firms. His research into these companies is revealing new knowledge about - and insights into - the business of high-technology and innovation.

Hand, an accounting professor at UNC Kenan-Flagler

Professor John Hand

and former chair of the accounting area, specializes in analyzing pre-IPO startups. "Of course, the first question in your mind is why on earth is an accounting professor researching startups, when startups don't even have significant financial statements!" he quips. The answer dates back to the Internet boom, when Hand was first out of the academic gate in studying the hot pricing of Internet stocks.

In his earlier Internet pricing research, Hand, a native of England who earned his MBA and PhD degrees at the University of Chicago and was on the faculties of Yale and the University of Chicago before moving to UNC in 1993, studied the connection between the financial statements of Internet companies and their stock market values, turning a few heads in the process.

What Hand found is that fundamental financial data such as performance, earnings and revenue explained much about the relative valuations in Net firm stock prices. But he also found that while there was "some method in the madness" of pricing the stocks against each other, there was "also lots of madness in the average level of those prices." "I remember telling my students in 1999 and early 2000 that Internet stocks were average 10 times overvalued but I was too poor to go short myself," he laments. But, he adds, he'll be ready for the next bubble.

Of course, the dot-com bubble turned into the dot-com bust. So Hand deftly leveraged the insights he'd gained by moving swiftly (and logically as he sees it) into researching the early stages of young companies' business activities.

His main analyses here have so far focused on the relations between the financial and non-financial information that a young firm reports and the equity values that venture capitalists place on it. In a study of U.S. biotech firms that is forthcoming in The Accounting Review, the flagship journal of the American Accounting Association, Hand finds that financial statements become more linked to firms' stock values as a young biotech company evolves and matures. Conversely, non-financial disclosures such as patent awards, strategic alliances, and equity dilution become less linked to firms' stock values. In another study soon to be under review, he shows that these same biotech firms are subject to a lot more risks in the pre-IPO venture capital market than they are in the public equity market.

Hand studied biotech firms because the industry is now about 30-years-old. This means that there's plenty of historical venture capital data available. Also, many biotech firms have already gone public over the years, forcing them to reveal private financial data from their previous five years of operation.

"Biotech provided a powerful sample to look at these things," he says. He notes that young biotech firms have "few financial assets in place but lots of non-financial information." "What I'm demonstrating may seem intuitive and obvious," he says, "but it's really very novel from an academic point of view because nobody has ever thought of looking at these issues outside of the public equities market." That may be because it's really hard to collect the data. Hand managed it by laying out cold hard cash and building personal relationships with multiple data providers.

The Next Five Years
As Hand sees it, the opportunities to add systematic, economic knowledge to what we know about young companies and their growth trajectories is huge. "There's been a surge in top quality research in entrepreneurial finance over the past decade, but it tends to focus on venture capitalists, rather than the companies they fund." He sees a rich agenda and no competitors on the horizon yet, particularly from colleagues in his discipline of accounting. He believes accounting professors are best positioned to look at young companies because accounting research typically blends economics, finance, management and strategy into one coherent package.

Hand is currently working on a project where he uses data on venture-backed companies stock option plans to study the potential effects (if any) of the Financial Accounting Standards Board's (FASB) push to require firms to expense employee stock options. Through his data provider contacts, he's acquired a large amount of information on the fraction of venture-backed firms' employees that receive stock options. Because this data is not disclosed by public companies, Hand believes he can provide useful, scientifically based evidence about what might happen to young firm's equity values if the FASB wins the highly contentious stock option expensing battle, rather than what he sees as groundless speculations and fears raised by young companies. Other projects he's developing delve into the compensation, disclosures, organizational structures and growth patterns of venture-backed young firms.

Thanks to his focus on financial statements in his research, Hand believes that he brings a fresh perspective to his Financial Statement Analysis (FSA) class. Rather than teach students about auditing and the other day-to-day accounting matters that they'll encounter early in their careers, he concentrates on giving them a longer-term perspective on their work.

"My FSA course helps deliver to them a big framework through which they can think in a business-smart manner about accounting, auditing and taxes," he says. "You have to understand the client's business, not simply the accounting issues. And those clients will be large and small, young and old, publicly traded and venture-backed. You have to know it all, sooner or later."