Suzanne G. Morsfield
University of Michigan–Dearborn
Christine E.L. Tan
Baruch College of the City University of New York
Abstract: This study examines whether venture capitalists (VCs) provide value-added monitoring by constraining earnings management in their portfolio firms. Extensive finance theoretical literature suggests that venture capitalists reduce principal-agent conflicts through their unique contracting, information collection, monitoring, and support skill/opportunity sets. However, little empirical accounting research exists to allow us to understand how or if this investor group constrains inappropriate management behavior with respect to its accounting and financial reporting decisions. This study documents first time evidence that the presence of venture capitalists plays a measurable and value-added financial reporting decision monitoring role in portfolio firms that initially access the public market for equity. We find consistent evidence that abnormal discretionary accruals are significantly lower and that long-run returns are significantly higher for VC-backed IPO firms relative to a matched sample of non-VC-backed IPO firms. These results are robust to alternative variable specifications and to controls for VC experience and investment levels.
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