Does Venture Capital Backing Improve Disclosure Controls and Procedures? Evidence from Management’s Post-IPO Disclosures Financial Reporting

54 Pages Posted: 8 Aug 2015 Last revised: 28 Apr 2021

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Lars Helge Hass

Lancaster University - Management School; University of Iowa - Henry B. Tippie College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Monika Tarsalewska

University of Exeter Business School

Date Written: April 22, 2021

Abstract

We investigate the impact of venture capital (VC) backing on the quality of disclosure controls and procedures, and the informativeness of entrepreneurial firms’ material weakness disclosures. We find that VC-backed entrepreneurial firms have stronger disclosure controls and procedures, as evidenced by their reporting fewer material weaknesses in internal control under Section 302 of the Sarbanes-Oxley Act. Material weakness disclosures by VC-backed entrepreneurial firms are more informative because they are more likely to be followed by subsequent financial statement restatements. Our findings suggest that demand from VCs plays an important role in determining the quality of entrepreneurial firm internal controls.

Keywords: Venture Capital, Initial Public Offerings, Disclosure Controls and Procedures, Material Weaknesses, Sarbanes-Oxley Act of 2002, Section 302, Management Disclosure, Corporate Governance

JEL Classification: D01, G24, G34, K4

Suggested Citation

Cumming, Douglas J. and Hass, Lars Helge and Myers, Linda A. and Tarsalewska, Monika, Does Venture Capital Backing Improve Disclosure Controls and Procedures? Evidence from Management’s Post-IPO Disclosures Financial Reporting (April 22, 2021). Available at SSRN: https://ssrn.com/abstract=2640873 or http://dx.doi.org/10.2139/ssrn.2640873

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://sites.google.com/view/douglascumming/bio?authuser=0

Lars Helge Hass

Lancaster University - Management School ( email )

Department of Accounting and Finance
Lancaster, LA1 4YX
United Kingdom

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Monika Tarsalewska (Contact Author)

University of Exeter Business School ( email )

Streatham Court, Streatham Campus,
Rennes Drive
Exeter, Devon EX4 4PU
United Kingdom

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