Exit Timing of Venture Capitalists in the Course of an Initial Public Offering

GEABA - Discussion Paper No. 01-14

20 Pages Posted: 17 May 2002

See all articles by Werner Neus

Werner Neus

Universitaet Tuebingen - Department of Banking

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Leibniz Institute for Financial Research SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

We analyze the disinvestment decision of venture capitalists in the course of the initial public offering (IPO) of their portfolio firms. Due to informational asymmetries, 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 for an additional period until the true value is revealed. The latter strategy, however, entails opportunity costs in the form of forgone investment in another attractive venture. We investigate this trade-off and show that the dilemma may be resolved via a reputation-acquiring mechanism in a repeated game set-up. In this set-up we can explain, for example, 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 in the course of an IPO. We show that young venture capitalists may use underpricing as a device for credibly committing themselves to acquiring reputation.

JEL Classification: G32, M13

Suggested Citation

Neus, Werner and Walz, Uwe, Exit Timing of Venture Capitalists in the Course of an Initial Public Offering (June 2001). GEABA - Discussion Paper No. 01-14, Available at SSRN: https://ssrn.com/abstract=310072 or http://dx.doi.org/10.2139/ssrn.310072

Werner Neus (Contact Author)

Universitaet Tuebingen - Department of Banking ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Uwe Walz

Goethe University Frankfurt - Institute of Economics ( email )

Postfach 81
D-60054 Frankfurt
Germany

Center For Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
560
Abstract Views
2,333
rank
54,254
PlumX Metrics