Public Policy and Venture Capital: Pursuing the Disclosure Goal

Abstract

We aim to investigate to what extent VCs affect the disclosure practices of investee firms through the annual reports. We jointly aim to evaluate the impact of public policy — mainly Sarbanes-Oxley Act — in the same terms. Using a sample of US firms went public within 2000-2011, we conduct the text analysis and find that the annual reports of VC-backed IPOs are much more readable compared to those of their peers. This suggests that VCs do need to be clear as much as possible towards the market in order that the latter can recognize the value created. Similarly, the public policy in response to scandals of early 2000 forces firms to produce longer reports in order to revel more information.

Keywords: Venture Capital, Public Policy, IPOs, Text Analysis, Readability

JEL Classification: G23, G24, G32, G38