How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding

Yanzhao Li (), Ju-e Guo (), Shaolong Sun () and Yongwu Li ()
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Yanzhao Li: Xi’an Jiaotong University
Ju-e Guo: Xi’an Jiaotong University
Shaolong Sun: Xi’an Jiaotong University
Yongwu Li: Beijing University of Technology

Financial Innovation, 2022, vol. 8, issue 1, 1-24

Abstract: Abstract Considering that the assumption of time consistency does not adequately reveal the mechanisms of exit decisions of venture capital (VC), this study proposes two kinds of time-inconsistent preferences (i.e., time-flow inconsistency and time-point inconsistency) to advance research in this field. Time-flow inconsistency is in line with the previous time inconsistency literature, while time-point inconsistency is rooted in the VC fund’s finite lifespan. Based on the assumption about the strategies guiding future behaviors, we consider four types of venture capitalists: time-consistent, time-point-inconsistent, naïve, and sophisticated venture capitalists, of which the latter three are time-inconsistent. We derive and compare the exit thresholds of these four types of venture capitalists. The main results include: (1) time-inconsistent preferences accelerate the exits of venture capitalists; (2) the closer the VC funds expiry dates are, the more likely time-inconsistent venture capitalists are to accelerate their exits; and (3) future selves caused by time-flow inconsistency weaken the effect of time-point inconsistency. Our study provides a behavioral explanation for the empirical fact of young VCs’ grandstanding.

Keywords: Venture capital; Time-inconsistent preferences; Start-ups; Exit decisions; Real options (search for similar items in EconPapers)
JEL-codes: D81 G24 G31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1186/s40854-021-00305-6

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