Initial Public Offerings, Earnings Management and Venture Capital: Evidence in Bull and Bear Market Conditions

34 Pages Posted: 24 May 2012

See all articles by Jaemin Cho

Jaemin Cho

Technology Innovation and Management Program, POSTECH

Jaeho Lee

affiliation not provided to SSRN

Date Written: February 7, 2012

Abstract

Earnings management at the time of the IPO is an important issue and has captured considerable attention of academic literatures. However, there have been few studies testing earnings management in the context of market condition, and when financial intermediaries such as venture capital (VC) involve in the IPO process. This study investigates how VCs influence on earnings management of IPOs upon market condition. We find evidence that if IPO firms go public in the bear market periods, VCs are more likely to inflate their earnings more aggressively at the IPO, compared to the bull market periods. Specifically, while most of studies have argued that VCs have certification effect and monitoring effect to discourage earnings management, we argue that, with empirical finding, VCs have incentives to inflate their IPOs’ earnings for harvesting high returns in the IPO year and the inflated earnings are more deepened in bear market periods.

Keywords: earnings management, venture capital, initial public offering, market condition, bull and bear market

JEL Classification: G14, G24, M41, N25

Suggested Citation

Cho, Jaemin and Lee, Jaeho, Initial Public Offerings, Earnings Management and Venture Capital: Evidence in Bull and Bear Market Conditions (February 7, 2012). Available at SSRN: https://ssrn.com/abstract=2065670 or http://dx.doi.org/10.2139/ssrn.2065670

Jaemin Cho

Technology Innovation and Management Program, POSTECH ( email )

Kyungbook Pohang NamGu
Hyoja dong
Pohang
Korea

Jaeho Lee (Contact Author)

affiliation not provided to SSRN ( email )

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