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The Exit of Venture Capital and Financial Disclosure in Newly-Public Firms

Luo, Wei (2005) The Exit of Venture Capital and Financial Disclosure in Newly-Public Firms. Doctoral Dissertation, University of Pittsburgh. (Unpublished)

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Abstract

This study addresses the relation between the exit of venture capital and opportunistic behavior in financial disclosure. Specifically, I examine whether the exit of venture capital is associated with income-increasing earnings management in the IPO year and financial statement restatements related to the period prior to the exit of venture capital. After controlling for the endogenous choice of exit, I document that, consistent with earnings management, the exit of venture capitalists (VCs) is significantly positively related to performance-matched discretionary accruals in the IPO year. Regardless of VCs' exiting, their stockholdings prior to the expiration of the lockup period are negatively related to discretionary accruals in the IPO year. Surprisingly, VC representation on the audit committee has no significant relation with income-increasing earnings management.Restatements are less likely to happen prior to or during the period of VCs' exit, and more likely to happen after VCs exiting. My results support this hypothesis. I find that the exit of venture capital right after the lockup expiration is negatively associated with the probability of announcing a restatement in the period T1, but positively associated with the probability of announcing a restatement in the period T2. More importantly, the exit of venture capital has a significant impact on the relation between VCs' stockholdings and the probability of announcing a restatement prior to VCs' exiting. Only for firms with VCs' exiting, does VC representation on the audit committee have a significantly negative association with the probability of announcing a restatement prior to VCs' exiting. Neither VCs' holdings nor VCs' representation on the audit committee has a significant relation with the probability of announcing a restatement after the exit of venture capital.The associations I find are robust to the usage of different instruments for the exit of venture capital, different measure for discretionary accruals, the inclusion of control variables for the intended use of proceeds, auditor's characteristics and CEO's incentives to manage earnings.Finally, my results indicate that as in the case without VC exit, firms with VCs exiting have similar abnormal stock returns during the lockup period and for the period from the lockup expiration through the record date of the first proxy available thereafter. The exit of venture capital is associated with a lower likelihood of securities class action after the IPO. In addition, I find some evidence that income-increasing earnings management imposes some costs on venture capitalists, e.g., fewer new IPOs and greater underpricing for new IPOs.Overall, my findings suggest that litigation risk and reputation cost are not strong enough to restrain venture capitalists from pursuing the benefits of opportunistic behavior in financial disclosure.


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Details

Item Type: University of Pittsburgh ETD
Status: Unpublished
Creators/Authors:
CreatorsEmailPitt UsernameORCID
Luo, Weiweluo@katz.pitt.edu
ETD Committee:
TitleMemberEmail AddressPitt UsernameORCID
Committee ChairNagarajan, Nandu Jnagaraja@katz.pitt.eduNAGARAJA
Committee MemberLeone, Andrew Jajl14@psu.edu
Committee MemberSrinivasan, Dhinudhinus@katz.pitt.eduDHINUS
Committee MemberEvans, John Hjhe@katz.pitt.eduJHE
Committee Member Lehn, Kenneth Mlehn@katz.pitt.eduDEFENSE
Committee Member Feng, Meimfeng@katz.pitt.eduMEF23
Date: 6 September 2005
Date Type: Completion
Defense Date: 22 August 2005
Approval Date: 6 September 2005
Submission Date: 31 August 2005
Access Restriction: No restriction; Release the ETD for access worldwide immediately.
Institution: University of Pittsburgh
Schools and Programs: Joseph M. Katz Graduate School of Business > Business Administration
Degree: PhD - Doctor of Philosophy
Thesis Type: Doctoral Dissertation
Refereed: Yes
Uncontrolled Keywords: Earnings Management; Exit; Reputation; Restatement; Venture Capital
Other ID: http://etd.library.pitt.edu/ETD/available/etd-08312005-025629/, etd-08312005-025629
Date Deposited: 10 Nov 2011 20:01
Last Modified: 15 Nov 2016 13:49
URI: http://d-scholarship.pitt.edu/id/eprint/9300

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