| This study addresses the relation between the exit of venture capital and opportunistic behavior in financial disclosure. Specifically, I examine whether the exit of venture capital is associated with income-increasing earnings management in the IPO year and financial statement restatements related to the period prior to the exit of venture capital. After controlling for the endogenous choice of exit, I document that Consistent with earnings management, the exit of venture capital is significantly positively related to performance-matched discretionary accruals in the IPO year. Regardless of VCs' exiting, VCs' stockholdings prior to the expiration of lockup period are negatively related to discretionary accruals in the IPO year. Surprisingly, VCs' representation on the audit committee has no significant relation with income-increasing earnings management.; Restatements are less likely to happen prior to or during the period of VCs' exit, and more likely to happen after VCs exiting. My results support this hypothesis. More importantly, the exit of venture capital has a significant impact on the relation between VCs' stockholdings and the probability of announcing a restatement prior to VCs' exiting. Only for firms with VCs' exiting, does VC representation on the audit committee have a significantly negative association with the probability of announcing a restatement prior to VCs' exiting. Neither VCs' holdings nor VCs' representation on the audit committee has a significant relation with the probability of announcing a restatement after the exit of venture capital.; The associations I find are robust to usage of different instruments for the exit of venture capital, different measure for discretionary accruals, the inclusion of control variables for the intended use of proceeds and auditor's characteristics, and CEO's incentives to manage earnings.; Finally, my results indicate that as firms without VCs exiting, firms with VCs exiting have similar abnormal stock returns during the lockup period and for the period from the lockup expiration through the record date of the first proxy available thereafter. The exit of venture capital is associated with less likelihood of securities class action after the IPO. In addition, I find some evidence that income-increasing earnings management imposes some costs for venture capitalists, e.g., fewer new IPOs and greater underpricing for new IPOs. |
