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VC political connections and IPO earnings management

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  • Wang, Qing (Sophie)
  • Anderson, Hamish
  • Chi, Jing

Abstract

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.

Suggested Citation

  • Wang, Qing (Sophie) & Anderson, Hamish & Chi, Jing, 2018. "VC political connections and IPO earnings management," Emerging Markets Review, Elsevier, vol. 35(C), pages 148-163.
    • Handle: RePEc:eee:ememar:v:35:y:2018:i:c:p:148-163
    DOI: 10.1016/j.ememar.2018.02.005
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    More about this item

    Keywords

    Earnings management; Venture capital; Political connections; VC exits;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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