The Effect Of Venture Capital Syndicate On Earnings Management And Performance Of IPO Firms

Venture capital is becoming more and more important in Chineseeconomy. Of355GEM listed companies, nearly60%has venture capitalbackground, nearly40%has venture capital syndicate background. Mostof the scholars believe that venture capital’s supervision can reducecompany’s earnings management activity, promote the performance afterIPO. However, as to venture capital syndicate, the sharing and integrationof resource within venture capital syndicate network is able to providemore help to company. At the same time, venture capital syndicate makesshareholding more dispersed which reduces the reputation effect and thusreduces the supervision enthusiasm. Also, there are frictions in venturecapital syndicate which increases collaboration costs and thus reduce thesupervision effect. Does this negative effect really exist? If it really exists,can we use more efficient ways to reduce this negative effect? This iswhat this paper wants to tell. This paper investigates the relationship between venture capitalnumber and pre-IPO earnings management using a sample of355IPOfirms in China GEM market during October2009and December2012.Then, this paper investigates the effect of venture capital internal featureson earnings management using a sample of132multi VC backedcompanies, trying to explore the best way to play a supervisory role inVC syndicate. After that, adding the variable of market performance,investigate the effect of venture capital number on performance after IPO.The empirical results indicate that IPO firms in China GEM has earningsmanagement behavior, and the degree of earnings management of VCbacked firms is higher than non-VC backed firms, the performance of VCbacked firms after IPO is lower than non-VC backed firms. And the morethe VC syndicate number, the higher the degree of earnings management,the higher the IPO underpricing, but the effect on mid and short termperformance after IPO is very little and unclear. Nevertheless, we canchoose the appropriate way to reduce the negative effects.