IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v131y2021icp278-286.html
   My bibliography  Save this article

Venture capitalists and assurance services on initial public offerings

Author

Listed:
  • Copley, Paul
  • Douthett, Edward
  • Zhang, Suning

Abstract

We investigate the effects of venture capital ownership on the demand for auditor reputation, the supply of assurance services, and the quality of financial reporting in the market for new issues. Extensive research exists on the relation between auditing and ownership, however, limited research exists on the relation between auditing and venture capital ownership, a form of ownership characterized as activist and that goes beyond the simple provision of capital. We find that venture capital ownership increases the demand for auditor reputation and that auditors provide a higher level of assurance service to a venture-capital-backed IPO. We also find that the presence of a venture capitalist is associated with lower financial reporting quality, however, this effect is largely offset when a high reputation auditor is also on the IPO. Our evidence is consistent with the argument that venture capitalists on the IPO influence the choice and the extent of auditing to communicate information to investors in a manner that maximizes venture capitalists’ returns for their portfolio fund.

Suggested Citation

  • Copley, Paul & Douthett, Edward & Zhang, Suning, 2021. "Venture capitalists and assurance services on initial public offerings," Journal of Business Research, Elsevier, vol. 131(C), pages 278-286.
    • Handle: RePEc:eee:jbrese:v:131:y:2021:i:c:p:278-286
    DOI: 10.1016/j.jbusres.2021.04.011
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148296321002514
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbusres.2021.04.011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Copley, Pa & Gaver, Jj & Gaver, Km, 1995. "Simultaneous Estimation Of The Supply-And-Demand Of Differentiated Audits - Evidence From The Municipal Audit Market," Journal of Accounting Research, Wiley Blackwell, vol. 33(1), pages 137-155.
    2. Gaver, Jennifer J & Gaver, Kenneth M, 1995. "Simultaneous Estimation of the Demand and Supply of Differentiated Audits," Review of Quantitative Finance and Accounting, Springer, vol. 5(1), pages 55-70, March.
    3. Dan A. Simunic & Michael T. Stein, 1990. "Audit risk in a client portfolio context," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 329-343, March.
    4. W. Robert Knechel & Marleen Willekens, 2006. "The Role of Risk Management and Governance in Determining Audit Demand," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1344-1367, November.
    5. Bradley, Daniel J. & Jordan, Bradford D., 2002. "Partial Adjustment to Public Information and IPO Underpricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(4), pages 595-616, December.
    6. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    7. Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
    8. Joseph Weber & Michael Willenborg, 2003. "Do Expert Informational Intermediaries Add Value? Evidence from Auditors in Microcap Initial Public Offerings," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 681-720, September.
    9. repec:bla:jfinan:v:53:y:1998:i:1:p:285-311 is not listed on IDEAS
    10. Brav, Alon & Gompers, Paul A, 1997. "Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    11. Carter, Richard B & Manaster, Steven, 1990. "Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    12. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    13. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-959, July.
    14. Willenborg, M, 1999. "Empirical analysis of the economic demand for auditing in the initial public offerings market," Journal of Accounting Research, Wiley Blackwell, vol. 37(1), pages 225-238.
    15. Megginson, William L & Weiss, Kathleen A, 1991. "Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    16. David C. Hay & W. Robert Knechel & Norman Wong, 2006. "Audit Fees: A Meta†analysis of the Effect of Supply and Demand Attributes," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 141-191, March.
    17. Paul A. Copley & Edward B. Douthett, 2002. "The Association between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Public Offerings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 49-76, March.
    18. Okeefe, Tb & Simunic, Da & Stein, Mt, 1994. "The Production Of Audit Services - Evidence From A Major Public Accounting Firm," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 241-261.
    19. W. Robert Knechel & Marleen Willekens, 2006. "The Role of Risk Management and Governance in Determining Audit Demand," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9-10), pages 1344-1367.
    20. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    21. Joseph Aharony & Chan†Jane Lin & Martin P. Loeb, 1993. "Initial Public Offerings, Accounting Choices, and Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 61-81, September.
    22. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Manal Alidarous, 2024. "Driving Venture Capital Interest: The Influence of the Big 4 Audit Firms on IPOs," JRFM, MDPI, vol. 17(7), pages 1-31, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Natalia Matanova & Tanja Steigner & Bingsheng Yi & Qiancheng Zheng, 2019. "Going concern opinions and IPO pricing accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 195-238, July.
    2. Michael O'Connor Keefe & David Gallagher, 2014. "Does the effect of revealed private information on initial public offering (IPO) first trading day return differ by IPO market heat?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(3), pages 921-964, September.
    3. Gounopoulos, Dimitrios & Kallias, Antonios & Kallias, Konstantinos & Tzeremes, Panayiotis G., 2017. "Political money contributions of U.S. IPOs," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 19-38.
    4. Su, Chen, 2015. "Does institutional reform improve the impact of investment bank reputation on the long-term stock performance of initial public offerings?," The British Accounting Review, Elsevier, vol. 47(4), pages 445-470.
    5. Bradley, Daniel J. & Gonas, John S. & Highfield, Michael J. & Roskelley, Kenneth D., 2009. "An examination of IPO secondary market returns," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 316-330, June.
    6. Klein, Peter G. & Wuebker, Robert & Zoeller, Kathrin, 2016. "Relationship banking and conflicts of interest: Evidence from German initial public offerings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 210-221.
    7. Larcker, David F. & Rusticus, Tjomme O., 2010. "On the use of instrumental variables in accounting research," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 186-205, April.
    8. Barry, Christopher B. & Mihov, Vassil T., 2015. "Debt financing, venture capital, and the performance of initial public offerings," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 144-165.
    9. Elizabeth Demers & Philip Joos, 2007. "IPO Failure Risk," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 333-371, May.
    10. Ting-Kai Chou & Jia-Chi Cheng & Chin-Chen Chien, 2013. "How useful is venture capital prestige? Evidence from IPO survivability," Small Business Economics, Springer, vol. 40(4), pages 843-863, May.
    11. Pei-Gi Shu & Yin-Hua Yeh & Shean-Bii Chiu & Fu-Sheng Ho, 2011. "The reputation effect of venture capital," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 533-554, May.
    12. Riccardo Ferretti & Antonio Meles, 2010. "Underpricing, wealth loss for pre-existing shareholders and the cost of going public: the role of private equity backing in Italian IPOs," Venture Capital, Taylor & Francis Journals, vol. 13(1), pages 23-47, September.
    13. Paul A. Copley & Edward B. Douthett, 2002. "The Association between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Public Offerings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 49-76, March.
    14. Jeppsson, Hans, 2018. "Initial public offerings, subscription precommitments and venture capital participation," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 650-668.
    15. David C. Hay & W. Robert Knechel & Norman Wong, 2006. "Audit Fees: A Meta†analysis of the Effect of Supply and Demand Attributes," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 141-191, March.
    16. Dae-il Nam & Haemin Dennis Park & Jonathan D. Arthurs, 2014. "Looking Attractive until You Sell: Earnings Management, Lockup Expiration, and Venture Capitalists," Journal of Management Studies, Wiley Blackwell, vol. 51(8), pages 1286-1310, December.
    17. Brandon Gipper & Luzi Hail & Christian Leuz, 2017. "On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data," NBER Working Papers 24018, National Bureau of Economic Research, Inc.
    18. Arnab Bhattacharya & Binay Bhushan Chakrabarti & Chinmoy Ghosh & Milena Petrova, 2020. "Innovations in financing: The impact of anchor investors in Indian IPOs," European Financial Management, European Financial Management Association, vol. 26(4), pages 1059-1106, September.
    19. Bajo, Emanuele & Chemmanur, Thomas J. & Simonyan, Karen & Tehranian, Hassan, 2016. "Underwriter networks, investor attention, and initial public offerings," Journal of Financial Economics, Elsevier, vol. 122(2), pages 376-408.
    20. Colaco, Hugh M.J. & Ghosh, Chinmoy & Knopf, John D. & Teall, John L., 2009. "IPOs, clustering, indirect learning and filing independently," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2070-2079, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbrese:v:131:y:2021:i:c:p:278-286. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbusres .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.