In this paper, we exam firm’s incentive to manage earnings raising external capital varies
with investor beliefs. Under the spline specification regression: a firm is more likely to
management earnings when investors are more optimistic about the industry prospects, but
more reluctant when investor belief is low. We evaluate monitory cost to explore the reasons
and find that using venture capitalists as specialized investors with lower monitoring costs
than other institutional investors, earnings management is less likely for low investor beliefs
but more likely for high investor beliefs for VC-backed firms relative to non-VC-backed
firms. We can also obtain the same results as former study that auditor’s quality negatively
related with earnings management. Considering above consequence, we documents IPOs
firms engaged in managing earnings with high investor beliefs have an influence on the
long-run abnormal stock return performance. These findings have implications for investors,
firms, and accounting standard setters. More prudential monitory is important during market
booming periods.
