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Do More Reputable Financial Institutions Reduce Earnings Management by IPO Issuers?

Gemma Lee

Kyung Hee University

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)

March 29, 2011

Journal of Corporate Finance, Forthcoming

This study investigates whether financial intermediaries (FIs) participating in the IPO process play a significant role in restraining earnings management (EM). Specifically, we examine whether EM around IPOs is negatively related to investment banks (IBs) and venture capital (VC) investor reputations. In general, we do not find evidence that VCs as a group significantly restrain EM by IPO issuers. However, we uncover strong evidence that more reputable VCs and IBs are associated with significantly less EM, which is consistent with them implicitly certifying the quality of issuer financial reports. Moreover, a stronger reduction in EM is found when more reputable IBs are matched with more reputable VCs, which indicates that VC and IB reputation are complements rather than substitutes. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing or reputation.

Number of Pages in PDF File: 44

Keywords: Underwriting, Venture Capital, IPO, Earnings Management, Propensity Score Matching

JEL Classification: D82, G14, G24, G32, D82, M13, M41

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Date posted: March 24, 2008 ; Last revised: March 31, 2011

Suggested Citation

Lee, Gemma and Masulis, Ronald W., Do More Reputable Financial Institutions Reduce Earnings Management by IPO Issuers? (March 29, 2011). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=891757

Contact Information

Gemma Lee
Kyung Hee University ( email )
1732 Deogyung-daero
Yongin-si, Gyeonggi-Do 446-701
Korea, Republic of (South Korea)
82-31-201-2314 (Phone)
82-31-201-2281 (Fax)
Ronald W. Masulis (Contact Author)
University of New South Wales - Australian School of Business ( email )
Sydney, NSW 2052
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
HOME PAGE: http://www.firn.org.au

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