Prospectus forecast publication and forecast errors: the role of venture capitalist certification

David Citron, Robert Cressy () and Xavier Gerard

Venture Capital, 2008, vol. 11, issue 2, 87-105

Abstract: Using a dataset of French IPOs over the period 1996--2000 we provide a test of the certification ability of venture capitalists (VCs). We do this in two ways. First we compare forecast publication between VC- and non-VC-backed IPOs. Secondly, conditional on publication, we investigate the accuracy of VC-backed versus non-VC-backed IPOs' prospectus forecasts. We also test for the association between VC reputation and both forecast issuance and forecast accuracy. VC concerns for reputation should result in lower chances of issuing a forecast and in more accurate forecasts for VC-backed IPOs. Our main findings are that (i) the prospectuses of IPOs backed by VCs are indeed less likely to include financial forecasts; (ii) high-reputation VC backers are associated with lower forecast errors. These findings are consistent with the Certification Hypothesis and are robust to controlling for both sample selection bias, due to the discretionary nature of prospectus forecast issuance, and for earnings management practices.

Date: 2008
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DOI: 10.1080/13691060802525296

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