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


  • We thank Christa Bouwman, Doug Cook, Anand Desai, Hui Guo, Thomas Hellmann, Chris Hennessey, Junsoo Lee, Jim Ligon, Thomas Moeller, Sukesh Patro, Mikhail Pevzner, Alexander Philipov, Mary Stone, David Walker, Suning Zhang, seminar participants at Kansas State University and University of Alabama, and participants at the 2010 Financial Intermediation Research Society Conference in Florence, Italy, the 2009 Conference on Empirical Legal Studies at University of Southern California, 2008 Center for Research in Security Prices Forum, European Finance Association—Athens meetings, Financial Management Association, Grapevine, TX meetings, George Mason University Conference on Fraud Prevention and Corporate Governance, and Washington Area Finance Conference for helpful comments. Special thanks are due to Dan Spulber (the editor), and to two anonymous referees and an anonymous coeditor for detailed comments and helpful suggestions. Agrawal acknowledges financial support from the William A. Powell, Jr. Chair in Finance and Banking.


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.