How Venture Capitalists Affect Earnings Management
This study investigates whether venture capital affects the probability of earnings management by initial public
offering (IPO) firms. Prior studies suggest that managers of IPO firms motivated by self-interest may exploit information
asymmetry and conduct accrual-based and/or real-activity earnings management to achieve their goals especially when
firms go public. Moreover, going public usually requires capital, and venture capital is one of the main sources of funding.
Building on the prior research, this study examines whether venture capitalist support affects the probability of earnings
management of IPO firms through real activity and/or accrual-based manipulation. Our empirical findings suggest that
venture capitalists mitigate the conflict of interest from agency problems and thus restrain accrual-based earnings
management. However, venture capitalists do not restrain all types of real earnings management by IPO firms. The IPO
firms backing by venture capital has a negative influence on long-term operating performance when the firms engage in
real earnings management.
Keyword- Initial Public Offering, Earnings Management, Venture capital