Disciplining Delegated Monitors: The Consequences of Failing to Prevent Fraud
Indiana University - Kelley School of Business
Gregory F. Udell
Indiana University Bloomington - Department of Finance
Indiana University Bloomington - Department of Finance; China Academy of Financial Research (CAFR)
September 26, 2012
Sixth Singapore International Conference on Finance 2012 Paper
Information-based theories of financial intermediation focus on delegated monitoring. However, there is little evidence on how markets discipline financial intermediaries who fail at this function. We exploit the direct link between corporate fraud and monitoring failure and examine how a venture capital (VC) firm’s reputation is affected when it fails to prevent fraud in its portfolio companies. We find that reputation-damaged VCs interact differently in the future with their limited partners, other VCs, and IPO underwriters because they are perceived as inefficient monitors. In addition, VCs who fail to prevent fraud experience greater difficulty in taking future portfolio companies public.
Number of Pages in PDF File: 52
Keywords: Corporate Fraud, Initial Public Offerings, Financial Intermediaries, Reputation, Venture Capital
JEL Classification: D01, D85, G2, G24, G3, K4working papers series
Date posted: March 10, 2011 ; Last revised: September 26, 2012
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