Venture capitalists and portfolio companies’ real activities manipulation

Venture capitalists and portfolio companies’ real activities manipulation I study the relation between venture capitalists’ (VCs) presence and real activities manipulation (RM). I find that compared to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. This is consistent with the argument that VCs do not inflate earnings when they exit the IPO firm but instead exercise a monitoring role to reduce the RM by other insiders. By the end of the second post-IPO fiscal year when VCs exit the portfolio companies, their impact on portfolio companies’ RM decreases dramatically. This suggests that the impact of VCs on portfolio companies is mainly through direct monitoring rather than through the establishment of a governance structure. A partitioned sample analysis indicates that VCs lapse their control and do not restrain RM during the Internet Bubble. VCs also tighten their control and reduce significantly RM in technology companies where managers engage in more aggressive RM, but they have no influence on RM in non-tech companies. Furthermore, using alternative VCs’ reputation proxies, I find that portfolio companies’ RM is negatively associated with VCs’ reputation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Venture capitalists and portfolio companies’ real activities manipulation

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0369-5
Publisher site
See Article on Publisher Site

Abstract

I study the relation between venture capitalists’ (VCs) presence and real activities manipulation (RM). I find that compared to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. This is consistent with the argument that VCs do not inflate earnings when they exit the IPO firm but instead exercise a monitoring role to reduce the RM by other insiders. By the end of the second post-IPO fiscal year when VCs exit the portfolio companies, their impact on portfolio companies’ RM decreases dramatically. This suggests that the impact of VCs on portfolio companies is mainly through direct monitoring rather than through the establishment of a governance structure. A partitioned sample analysis indicates that VCs lapse their control and do not restrain RM during the Internet Bubble. VCs also tighten their control and reduce significantly RM in technology companies where managers engage in more aggressive RM, but they have no influence on RM in non-tech companies. Furthermore, using alternative VCs’ reputation proxies, I find that portfolio companies’ RM is negatively associated with VCs’ reputation.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Apr 6, 2013

References

  • Accounting scandals in IPO firms: do underwriters and VCs help?
    Agrawal, A; Cooper, T
  • Accrual-based and real earnings management activities around seasoned equity offerings
    Cohen, DA; Zarowin, P
  • Do insiders manipulate earnings when they sell their shares in an initial public offering?
    Darrough, M; Rangan, S
  • Detecting earnings management
    Dechow, PM; Sloan, RG; Sweeney, AP
  • Earnings management, stock issues, and shareholder lawsuits
    DuCharme, LL; Malatesta, PH; Sefcik, SE
  • Optimal investment, monitoring, and the staging of venture capital
    Gompers, PA

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