Research Bytes: VC influence

Examine IPO accounting data more delicately when firms go public in the bear market periods.

That is the advice of Jaemin Cho and Jaeho Lee in ‘IPOs, Earnings Management, and Venture Capital: Evidence in Bull and Bear Market Conditions’ ( >www.ssrn.com). Reason: “VCs may support inflating firms’ earnings opportunistically in order to exit their ownership positions in the IPO year, especially in the bear market period.”

The authors take up the argument that VCs have a significant influence on financial reporting practices in the IPO process for harvesting, and find evidence that VCs have incentives to inflate their IPOs’ earnings for exit and that earnings management could be deepened by market condition.

The study is based on the data of 598 IPO firms from the Korean Securities Dealers Automated Quotation (KOSDAQ) from 2001 to 2009. KOSDAQ is a secondary stock market of South Korea that consists of relatively younger, smaller, and technology-based firms, one learns. The reasoning behind the choice of the sample is that the information asymmetry problem is believed to be more severe in KOSDAQ than in the Korea Stock Exchange (KSE), the IPO regulations being less stringent for the former. The authors are, therefore, of the view that it is more likely for IPO companies listed in KOSDAQ to have a stronger motivation to manage earnings using this “window of information asymmetry.”

Insights of value to demystify IPO performance.