Venture Capital and Corporate Governance in the Newly Public Firm

Abstract:     
This paper examines the effects of venture capital backing on the corporate governance of the firm following the IPO. I conduct three independent sets of tests examining effectively how governance and monitoring might differ for venture- and non-venture-backed firms. First, I find that venture-backed firms have lower earnings management, as measured by the level of their discretionary accounting accruals, than similar non-venture-backed firms. Second, venture-backed firms experience a significantly higher wealth effect upon the announcement of the adoption of a shareholder rights agreement (poison pill) than non-venture-backed firms, consistent with the hypothesis that venture-backed firms are more likely than non-venture-backed firms to use these agreements for the purpose of shareholder wealth maximization. Finally, venture-backed firms have boards of directors, audit committees and compensation committees that are more independent from management than those of similar non-venture backed firms, and are more likely to separate the roles of CEO and chairman. These results are robust to attempts to control for the endogeneity of receiving venture capital financing. I provide evidence that suggests that these effects are not common to all pre-IPO large shareholders.

Working Paper Series