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Looking Attractive until You Sell: Earnings Management, Lockup Expiration, and Venture Capitalists
Author(s) -
Nam Daeil,
Park Haemin Dennis,
Arthurs Jonathan D.
Publication year - 2014
Publication title -
journal of management studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.398
H-Index - 184
eISSN - 1467-6486
pISSN - 0022-2380
DOI - 10.1111/joms.12093
Subject(s) - initial public offering , earnings management , business , venture capital , reputation , earnings , expiration , stock price , monetary economics , accounting , earnings quality , finance , economics , medicine , paleontology , social science , sociology , series (stratigraphy) , respiratory system , accrual , biology
Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering ( IPO ) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists ( VC s). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VC s are less likely to manage earnings, suggesting that reputable VC s serve an auditing function following an IPO . Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.