Looking Attractive Until You Sell: Earnings Management, Lockup Expiration, and Venture Capitalists

25 Pages Posted: 14 Nov 2014

See all articles by Dae‐il Nam

Dae‐il Nam

Korea University Business School (KUBS)

Haemin Park

Drexel University - Department of Management

Jonathan D. Arthurs

Washington State University

Date Written: December 2014

Abstract

Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering (IPO) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists (VCs). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VCs are less likely to manage earnings, suggesting that reputable VCs serve an auditing function following an IPO. Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.

Keywords: earnings management, IPO, lockup expiration, negative signals, venture capitalists

Suggested Citation

Nam, Dae‐il and Park, Haemin and Arthurs, Jonathan D., Looking Attractive Until You Sell: Earnings Management, Lockup Expiration, and Venture Capitalists (December 2014). Journal of Management Studies, Vol. 51, Issue 8, pp. 1286-1310, 2014. Available at SSRN: https://ssrn.com/abstract=2524154 or http://dx.doi.org/10.1111/joms.12093

Dae‐il Nam (Contact Author)

Korea University Business School (KUBS)

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701

Haemin Park

Drexel University - Department of Management ( email )

Philadelphia, PA 19104
United States

Jonathan D. Arthurs

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

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