VC political connections and IPO earnings management

We examine the effect of VC political connections on accrual and real earnings management (EM) of IPOs controlled by private entrepreneurs in China. We find IPOs backed by government-controlled VCs exhibit severe IPO-year EM, which is driven by those VCs exiting their investments immediately after t...

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Bibliographic Details
Published inEmerging markets review Vol. 35; pp. 148 - 163
Main Authors Wang, Qing (Sophie), Anderson, Hamish, Chi, Jing
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.06.2018
Subjects
Earnings management
Political connections
VC exits
Venture capital
G24
Earnings management
VC exits
Political connections
G32
Venture capital
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Summary:We examine the effect of VC political connections on accrual and real earnings management (EM) of IPOs controlled by private entrepreneurs in China. We find IPOs backed by government-controlled VCs exhibit severe IPO-year EM, which is driven by those VCs exiting their investments immediately after the VC lock-up expiration. In contrast, IPOs with politically connected private VCs have lower IPO-year EM and are not associated with VC exits. Therefore, IPOs with government-controlled VCs who immediately exit their investments are most likely to engage in ‘window-dressing’ of financial performance, and to have poorer long-run stock performance. The results remain unchanged after a battery of robustness tests. •Chinese government-controlled VCs' portfolio firms manage earnings during IPO process.•Government-controlled VCs' portfolio firms exhibit poorer long-run stock performance.•And typically exit their portfolio firms immediately after lock-up expiration.•Politically connected private VCs associated with lowest level of earning management.
ISSN:1566-0141
1873-6173
DOI:10.1016/j.ememar.2018.02.005