The dynamics of earnings management in IPOs and the role of venture capital |
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| Institution: | 1. Fundacao Getulio Vargas, School of Business at Sao Paulo, FGV-EAESP, Av. Nove de Julho, 2029 – Sala 912, São Paulo, SP, 01313-902, Brazil;2. Federal Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OH, 44101-1387, United States;3. Fundacao Getulio Vargas, School of Economics at Sao Paulo, FGV EESP, Rua Itapeva,474 – Sala 1002, São Paulo, SP, 01313-902, Brazil |
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| Abstract: | We investigate the dynamics of earnings management (EM) in IPOs and the role of venture capitalist (VC) in hampering such practice. We study the behavior of EM in four phases: Pre-IPO, IPO, Lock-up and Post-lock-up. We find that VC-sponsored firms tend to do more EM in the Pre-IPO period, and less in two subsequent periods. These results are distinct for those of Wongsunwai (2013), for which, VC-sponsored firms do less EM only in the IPO period. We also find that VC and non-VC-sponsored firms do EM around the IPO in distinct fashions. Non-VC-sponsored firms inflate earnings during the IPO period and deflate in the Lock-up and Post-lock-up periods. VC-sponsored firms inflate earnings in the Pre-IPO period and deflate earnings only in the Lock-up period. Our results are robust with respect to how one measures EM and the statistical methods used. |
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| Keywords: | Earnings management IPO Venture capital |
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