Are there long-term costs to obtaining venture capital financing? We explore the
hypothesis that venture capital backed firms do not efficiently transform to the corporate
structure of public firms and have difficulties publicly communicating with arm’s length investors. Our results are three fold. First, we find that, on average, reported accounting earnings are less informative for venture capital backed firms. Second, the informativeness of reported earnings is a decreasing function of venture capitalists’ ownership of firm equity and a decreasing function of venture capitalists’ board representation. Third, stock prices of venture capital backed firms reflect future earnings to a lesser extent relative to non-venture capital backed firms. Our findings support the hypothesis that venture capitalists manage the flow of public information to capital markets and preserve short term interests arising from specific investment and ownership horizons. This evidence suggests that the benefits of receiving venture capital financing
are not without costs
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