A Pecking Order of Venture Capital Exits

17 Pages Posted: 17 Jul 2006 Last revised: 13 Apr 2008

See all articles by Carsten Bienz

Carsten Bienz

Norwegian School of Economics (NHH)

Tore E. Leite

Norwegian School of Economics (NHH)

Date Written: April 2008

Abstract

We develop a model of exits from venture capital backed companies based on post-exit moral hazard. It captures the trade-off between the two most important exit choices: IPOs and trade sales. The model shows that highly profitable companies that need few oversight will go public, while less profitable companies that require more control will be sold in a trade sale. This suggests that the common notion that IPOs per se are more profitable than sales is wrong and observed returns suffer from a measurement bias. This is consistent with empirical evidence that IPOs have indeed higher rates of return than trade sales.

Keywords: venture capital, IPO, trade sale, corporate governance, moral hazard, disinvestment, exit strategy

JEL Classification: G24, G32, G34

Suggested Citation

Bienz, Carsten and Leite, Tore E., A Pecking Order of Venture Capital Exits (April 2008). Available at SSRN: https://ssrn.com/abstract=916742 or http://dx.doi.org/10.2139/ssrn.916742

Carsten Bienz (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen
Norway

Tore E. Leite

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 5595 9343 (Phone)
+47 5595 9841 (Fax)

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