Do Underwriters or Venture Capitalists Restrain Earnings Management by IPO Issuers?

Abstract:     
This study investigates whether financial intermediaries participating in the IPO process appear to play a significant role in restraining earnings management. More specifically, we examine whether earnings management around an IPO is negatively related to the reputations of underwriters and venture capital (VC) investors. We find strong evidence that more reputable investment banks are associated with significantly less earnings management, which is consistent with them implicitly certifying the quality of issuers' financial reporting. In contrast, neither VC investment, nor backing by more reputable VCs significantly restrains earnings management by IPO issuers. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing.

Keywords: Underwriting, Venture Capital, IPO, Earnings Management, Propensity Score Matching

JEL Classifications: D82, G14, G24, G32, D82, M13, M41

Working Paper Series