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

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  • Neus, Werner
  • Walz, Uwe

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.
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Suggested Citation

  • Neus, Werner & Walz, Uwe, 2005. "Exit timing of venture capitalists in the course of an initial public offering," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 253-277, April.
    • Handle: RePEc:eee:jfinin:v:14:y:2005:i:2:p:253-277
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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