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

44 Pages Posted: 24 Mar 2008 Last revised: 31 Mar 2011

See all articles by Gemma Lee

Gemma Lee

Kyung Hee University

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: March 29, 2011

Abstract

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.

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

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

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

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, Sydney ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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