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Do more reputable financial institutions reduce earnings management by IPO issuers?

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  • Lee, Gemma
  • Masulis, Ronald W.

Abstract

This study investigates whether financial intermediaries (FIs) participating in the IPO process play a significant role in restraining earnings management (EM). Specifically, we examine whether EM around IPOs is negatively related to investment banks (IBs) and venture capital (VC) investor reputations. In general, we do not find evidence that VCs as a group significantly restrain EM by IPO issuers. However, we uncover strong evidence that more reputable VCs and IBs are associated with significantly less EM, which is consistent with them implicitly certifying the quality of issuer financial reports. Moreover, a stronger reduction in EM is found when more reputable IBs are matched with more reputable VCs, which indicates that VC and IB reputation are complements rather than substitutes. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing or reputation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 17 (2011)
Issue (Month): 4 (September)
Pages: 982-1000

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Handle: RePEc:eee:corfin:v:17:y:2011:i:4:p:982-1000

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Underwriting Venture capital IPO Earnings management Propensity score matching;

References

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Citations

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Cited by:
  1. Xiang Liu, 2014. "Venture capitalists and portfolio companies’ real activities manipulation," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 173-210, July.
  2. Chahine, Salim & Arthurs, Jonathan D. & Filatotchev, Igor & Hoskisson, Robert E., 2012. "The effects of venture capital syndicate diversity on earnings management and performance of IPOs in the US and UK: An institutional perspective," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 179-192.

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