Private Equity’s Impact on Financial Reporting Quality: Evidence from Post-IPO Exits

• In Event: Governance and Managerial Ability

Abstract

Whether private equity (PE) firms improve portfolio firms’ corporate governance has long been an empirical question. Using a sample of firms that went public between 1998 and 2015, I examine whether PE firms affect portfolio firms’ financial reporting quality through restatement and litigation occurrence in the post-IPO period. Comparing with non-PE-backed firms, I find that PE-backed firms are more likely to be involved in material restatements during the five-year post-IPO period. Furthermore, PE-backed firms are more likely to receive securities class actions and AAERs. Cross-sectional analyses provide corroborating evidence that PE ownership weakens portfolio firms’ financial reporting quality due to short investment horizons and collusion with board of directors. Additional analyses show that the results are not driven by extra fraud detection effort or heightened legal or regulatory attention towards PE-backed firms. Overall, the paper contradicts prior findings in the literature (Katz 2009) and provides new insights into the opportunistic role of PE firms.

Author

• Shuyang Wang, University of Illinois-Urbana-Champaign