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

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