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How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding

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  • Yanzhao Li

    (Xi’an Jiaotong University)

  • Ju-e Guo

    (Xi’an Jiaotong University)

  • Shaolong Sun

    (Xi’an Jiaotong University)

  • Yongwu Li

    (Beijing University of Technology)

Abstract

Considering that the assumption of time consistency does not adequately reveal the mechanisms of exit decisions of venture capital (VC), this study proposes two kinds of time-inconsistent preferences (i.e., time-flow inconsistency and time-point inconsistency) to advance research in this field. Time-flow inconsistency is in line with the previous time inconsistency literature, while time-point inconsistency is rooted in the VC fund’s finite lifespan. Based on the assumption about the strategies guiding future behaviors, we consider four types of venture capitalists: time-consistent, time-point-inconsistent, naïve, and sophisticated venture capitalists, of which the latter three are time-inconsistent. We derive and compare the exit thresholds of these four types of venture capitalists. The main results include: (1) time-inconsistent preferences accelerate the exits of venture capitalists; (2) the closer the VC funds expiry dates are, the more likely time-inconsistent venture capitalists are to accelerate their exits; and (3) future selves caused by time-flow inconsistency weaken the effect of time-point inconsistency. Our study provides a behavioral explanation for the empirical fact of young VCs’ grandstanding.

Suggested Citation

  • Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.
    • Handle: RePEc:spr:fininn:v:8:y:2022:i:1:d:10.1186_s40854-021-00305-6
    DOI: 10.1186/s40854-021-00305-6
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    1. Li, Yanzhao & Guo, Ju-e & Li, Yongwu & Zhang, Jinggong, 2024. "Intensified distortion: Investment decisions with endogenous contracts and time inconsistency," Finance Research Letters, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Venture capital; Time-inconsistent preferences; Start-ups; Exit decisions; Real options;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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