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    Venture Capital, Private Equity and Earnings Quality

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    Publication type
    Working paper
    Author
    Beuselinck, Christof
    Deloof, Marc
    Manigart, Sophie
    Publication Year
    2004
    Publication Issue
    2
    Publication Number of pages
    50
    
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    Abstract
    This paper examines the quality of financial statements reported by private equity (PE) backed companies in the years around the initial PE investment. We study both pre- and post-investment earnings characteristics of a unique hand-collected sample of 556 Belgian unlisted companies, receiving PE financing between 1985 & 1999, and a matched non-PE backed sample. We find strong evidence of upward earnings management in the PE backed sample prior to the investment year, consistent with the hypothesis that entrepreneurs which apply for PE manage earnings upward to catch PE investors' interest. Further, PE backed companies show a significantly higher extent of earnings conservatism compared to matched companies from the investment year on, indicating a governance impact of PE investors on the financial reporting discipline. Finally, we find a marginally higher degree of earnings conservatism for companies receiving PE from non-government related investors compared to companies backed by government-related PE investors. We interpret this stricter financial reporting discipline as being the reflection of a more slack governance by government-related PE investors compared to non-government-related investors. Our results have implications for PE investors as well as for all other stakeholders of PE backed firms.
    Keyword
    Corporate Finance
    Knowledge Domain/Industry
    Accounting & Finance
    URI
    http://hdl.handle.net/20.500.12127/1140
    Other links
    http://public.vlerick.com/Publications/d555a0a5-69a9-e011-8a89-005056a635ed.pdf
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