Download or read book Do Venture Capitalists Constrain or Encourage Earnings Management in Initial Public Offerings written by Suzanne G. Morsfield and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether venture capitalists (VCs) provide value-added monitoring by constraining IPO-related earnings management in their portfolio firms. Finance theoretical literature is mixed as to its characterization of whether venture capitalists reduce principal-agent conflicts through their unique contracting, information collection, monitoring, and support skill/opportunity sets, or whether VCs have incentives to exploit their unique skills and proximity to firm management at the expense of other investors. Little empirical research has focused to date on identifying observable and measurable tests of specific elements of the perceived VC governance skills or incentives set on the actual market value of the firms in their investment portfolios. Earnings management around an IPO is a context where we may be able to both observe and quantify the impact of these perceived skills and incentives. Consistent with the current accounting theory of earnings management detection, we focus on a specific capital markets context where the use of inappropriate earnings-increasing discretionary accruals is expected - i.e., the initial public offering (IPO) setting. We find evidence that abnormal discretionary accruals are significantly lower and that long-run returns are significantly higher for VC-backed IPO firms relative to a matched sample of non-VC-backed IPO firms - these findings suggest that VCs behave more like principals than agents in this context. We also provide evidence that the direction of the discretionary accruals (i.e., income-increasing versus income-decreasing) is important when attempting to understand both the presence and determinants of earnings management in an IPO context. When positive and negative accruals are examined separately, VC presence is related to lower income-increasing discretionary accruals. We find no association between VC presence and income-decreasing accruals. Our results are robust to alternative variable specifications, and to controls for IPO market cycles and IPO lockup provisions.