Venture Capital and Timing of IPO
TELECOM Ecole de Management; Université Paris I Panthéon-Sorbonne
September 1, 2007
Paris December 2007 Finance International Meeting AFFI-EUROFIDAI Paper
Our purpose is to find the optimal exit time of a venture capitalist (VC) under profit flow uncertainty. We consider that the VC sells his holding in two steps: at the offer price at the date of the initial public offering (IPO) taking into account the underpricing, then at the expiration of the lock-up period. We use a real options approach when the profit flow of the venture capital backed company follows an arithmetic Brownian motion. We find a closed-form solution of the threshold at which it is optimal for the VC to exit and also determine the expected first hitting time.
Number of Pages in PDF File: 22
Keywords: Venture capital, Real options, Timing of IPO, dynamic programming
JEL Classification: C61, D81, G11, G24working papers series
Date posted: December 16, 2007
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