The Venture Capitalists being the Largest or Second Largest Shareholder and Earnings Management

Purpose: A venture company does not generally have innate governance which can perform a thorough monitoring of management, especially because it is not precisely separated its management from ownership. Few studies have addressed the relation between venture capital and earnings management. This study aims to find venture capitalists’ role as governance in venture companies by examining the effect of the venture capitalists being the major shareholder on manager's opportunistic earnings management. Research design, data, and methodology: This study investigates the sample of 1,469 firm-year observations listed on the KOSDAQ market during the 2006-2011 period. Moreover, following prior research, this study uses ordinary least squares regressions (OLS) to test Hypotheses formulated. Results: The findings suggest that earnings management is lower for venture companies whose ownership structure includes the venture capitalist as the largest shareholder and that the extent of earnings management is different across three types of the venture capitalists that are the largest shareholder. However, the venture capitalist as the second shareholder has little effect on earnings management. Conclusions: The findings showed the existence of venture capitalists’ role as governance. Therefore, this study discusses potential implications that there is a greater need for objective venture capitalists’ role to guide policy-making in corporate governance.