Accounting Scandals in IPO Firms: Do Underwriters and VCs Help?

68 Pages Posted: 3 Mar 2008 Last revised: 15 Mar 2010

See all articles by Anup Agrawal

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Tommy Cooper

University of Alabama - Department of Economics, Finance and Legal Studies

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Date Written: June 15, 2009

Abstract

This paper examines whether underwriter reputation, venture capitalist (VC) backing, and VC reputation are related to the probability that a newly public firm has serious accounting problems. We examine a sample of firms that went public during 1995-2005 and announced restatements within three years of their initial public offerings (IPOs), and a control sample of non-restating IPO firms matched by industry and IPO size. We use a variety of sources to assemble a novel dataset that includes hand-collected data on underwriters, VCs, corporate governance, executive compensation, and other IPO-firm characteristics. We use paired logistic regressions to examine how the probability of restatement by an IPO firm is related to the reputation of its lead underwriter, VC backing, and the reputation of its lead VC. We test several competing hypotheses and control for other factors that prior studies have found to be significant determinants of the probability of restatement. We find that the probability of restatement by a newly public firm is 1) consistently and positively related to the reputation of its lead underwriter, 2) negatively related to VC backing and the reputation of its lead VC in several sub-samples where misstatements are likely to be more harmful to VC reputations, and 3) negatively related to the maturity of its lead VC. The endogenous selection of a more reputable underwriter or VC backing does not appear to drive our results. Our findings suggest that VCs, especially those that are mature and reputable, have positive influence as monitors on the financial reporting quality of IPO firms, while underwriters’ concerns about generating revenue appear to override their reputational concerns.

Keywords: Accounting scandals, Financial restatements, Financial misreporting, IPO, Venture capital, VC-backing, Underwriter reputation

JEL Classification: G24, G34, K22, M41

Suggested Citation

Agrawal, Anup and Cooper, Tommy, Accounting Scandals in IPO Firms: Do Underwriters and VCs Help? (June 15, 2009). EFA 2008 Athens Meetings Paper, CELS 2009 4th Annual Conference on Empirical Legal Studies Paper, Available at SSRN: https://ssrn.com/abstract=1009782 or http://dx.doi.org/10.2139/ssrn.1009782

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://aagrawal.people.ua.edu/

Tommy Cooper (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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