Venture capitalists and portfolio companies’ real activities manipulation

Xiang Liu ()

Review of Quantitative Finance and Accounting, 2014, vol. 43, issue 1, 173-210

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. Copyright Springer Science+Business Media New York 2014

Keywords: Venture capital; Real activities manipulation; Accruals manipulation; Initial public offerings; Monitoring; Moral hazard; G24; M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11156-013-0369-5

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