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Disciplining Delegated Monitors: When Venture Capitalists Fail to Prevent Fraud by Their IPO Firms

69 Pages Posted: 10 Mar 2011 Last revised: 1 Sep 2015

Xuan Tian

Tsinghua University - PBC School of Finance

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Xiaoyun Yu

Indiana University - Kelley School of Business - Department of Finance; China Academy of Financial Research (CAFR)

Date Written: August 31, 2015

Abstract

Information-based theories of financial intermediation focus on delegated monitoring. However, there is little evidence on how markets discipline 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 ineffective monitors. In addition, VCs that fail to prevent fraud experience greater difficulty in taking future portfolio companies public.

Keywords: Corporate Fraud, Initial Public Offerings, Financial Intermediaries, Reputation, Venture Capital

JEL Classification: D01, D85, G2, G24, G3, K4

Suggested Citation

Tian, Xuan and Udell, Gregory F. and Yu, Xiaoyun, Disciplining Delegated Monitors: When Venture Capitalists Fail to Prevent Fraud by Their IPO Firms (August 31, 2015). Sixth Singapore International Conference on Finance 2012 Paper. Available at SSRN: https://ssrn.com/abstract=1782238 or http://dx.doi.org/10.2139/ssrn.1782238

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Xiaoyun Yu (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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