Exit timing of venture capitalists in the course of an initial public offering

Werner Neus and Uwe Walz ()

No 2002/07, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We analyze the desinvestment decision of venture capitalists in the course of an IPO of their portfolio firms. The capital market learns of the project quality only in the period following the IPO. Venture capitalists with high-quality firms face a trade-off between immediately selling their stake in the venture at a price below the true value and having to wait until the true value is revealed. We show that the dilemma may be resolved via a reputation-acquiring mechanism in a repeated game set-up. Thereby, we can explain, e.g., the advent of 'hot-issue market behavior' involving early disinvestments and a high degree of price uncertainty. Furthermore, we provide a new rationale for underpricing. Young venture capitalists may use underpricing as a device for credibly committing themselves to acquiring reputation.

Keywords: Exit Decisions; Venture Capital; IPO; Underpricing (search for similar items in EconPapers)
JEL-codes: D82 G14 G24 (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Exit timing of venture capitalists in the course of an initial public offering (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200207

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