Initial Public Offerings, Earnings Management and Venture Capital: Evidence of Bull and Bear Market Conditions in Korea

Earnings management at the time of the IPO is an important issue and has captured considerable attention of academic literatures. However, there have been few studies testing earnings management in the context of market condition, and when financial intermediaries such as venture capital (VC) involve in the IPO process. In this study, we examine the impact of market condition and VC presence on portfolio companies’ earnings management behavior. We find that, with empirical finding in Korea, VCs have incentives to inflate their IPOs’ earnings for harvesting, and that the inflated earnings are more deepened in bear market periods and when less reputable VCs are involved.