Liquidity Risk and Venture Capital Finance

Financial Management, Vol. 34, pp. 77-105, 2005

41 Pages Posted: 1 Jun 2004 Last revised: 22 Oct 2014

See all articles by Grant Fleming

Grant Fleming

Continuity Capital Partners

Armin Schwienbacher

SKEMA Business School

Douglas J. Cumming

Florida Atlantic University

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This paper provides theory and evidence in support of the proposition that venture capitalists adjust their investment decisions according to liquidity conditions on IPO exit markets. We refer to technological risk as a choice variable in terms of the characteristics of the entrepreneurial firm in which the venture capitalist invests, and liquidity risk as the current and expected future external exit market conditions. We show that in times of expected illiquidity of exit markets (high liquidity risk), venture capitalists invest proportionately more in new high-tech and early-stage projects (high technology risk) in order to postpone exit requirements. When exit markets are liquid, venture capitalists rush to exit by investing more in later-stage projects. We further provide complementary evidence that shows conditions of low liquidity risk give rise to less syndication. Our theory and supporting empirical results facilitate a unifying theme that links related research on illiquidity in private equity.

Suggested Citation

Fleming, Grant Alan and Schwienbacher, Armin and Cumming, Douglas J., Liquidity Risk and Venture Capital Finance. Financial Management, Vol. 34, pp. 77-105, 2005, Available at SSRN:

Grant Alan Fleming

Continuity Capital Partners ( email )

GPO Box 314
Canberra, Australian Capital Territory 2601

Armin Schwienbacher

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777


Douglas J. Cumming (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States


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