Does Venture Capital Backing Improve Internal Control Quality? Evidence from Management’s Post-IPO Disclosures about the Quality of Internal Controls over Financial Reporting

In this paper, we investigate the association between venture capital (VC) backing and internal control quality, as well as the effect of VC backing on the informativeness of material weaknesses in internal control disclosures. We find that VC-backed companies have stronger internal control systems, as evidenced by the reporting of fewer material weaknesses in internal control. Furthermore, material weakness disclosures are more informative, in that they are more likely to be followed by subsequent financial statement restatements, when they are disclosed by VC-backed companies. Overall, the evidence indicates that VC firms play an important role in determining the quality of internal controls and in promoting the effective disclosure of material weaknesses