Accounting Scandals in IPO Firms: Do Underwriters and VCs Help?

(Editor's Note: This post comes to us from Anup Agrawal, Professor and Powell Chair of Finance, University of Alabama – Culverhouse College of Commerce & Business Administration, and Tommy Cooper, Kansas State University – Department of Finance.) In the paper, "Accounting Scandals in IPO Firms: Do Underwriters and VCs Help?," which is currently available on SSRN, we examine whether underwriter reputation, venture capitalist (VC) backing, and VC reputation are related to the probability that a newly public firm has serious accounting problems. Using a novel data set, we find that the probability of restatement by an initial public offering (IPO) firm is positively related to underwriter reputation and negatively related to VC backing, VC reputation, and VC maturity. Our results do not appear to be driven by the endogeneity of underwriter reputation or VC backing. Our findings suggest that while VCs positively influence the financial reporting quality of IPO firms, underwriters concerns about revenue generation outweigh their concerns about reputation.

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