Venture Capital Directors, Earnings Manipulation, & Firm Performance

Abstract

The accounting system allows for flexibility in how earnings are presented, and this flexibility is susceptible to the incentives for managers and controlling stakeholders. Venture Capital (VC) firms have competing incentives when it comes to bringing portfolio firms public at an initial public offering (IPO), and the power that VC directors exert over the firm allows them to control policies set by the firm, including the disclosure of earnings. VC firm investors typically do not liquidate their holdings in portfolio firms until more than a year after the IPO, which means VC directors have an incentive to bring only high quality portfolio firms public. However, VC directors also have an incentive to bring portfolio firms to market faster, i.e., to "grandstand." This dissertation looks to social networks of VC directors to explain earnings manipulation and, in turn, firm performance more than a year after IPO. My purpose is to demonstrate how social networks determine the dominating incentives and how social networks influence the relationship between earnings manipulation at IPO and firm performance more than a year afterward. The main premise of my dissertation is that embeddedness, or the degree to which individuals and organizations are connected, influences malfeasance.