Abstract
Based on the assumption that the long-term value of a venture capital satisfies the algebraic Brownian motion, we develop a continuous-time exit model of venture capital under different exit modes, namely, initial public offering (IPO) and mergers and acquisitions (M&A). The employee incentive problem is analyzed jointly with the exit decision of the firm in terms of the exit timing and the exit mode. Further, the problem of capital exit is considered from two perspectives, namely, optimal venture capital and social welfare maximization, and the differences between these exit decisions are compared. Our model predicts that the timing of an IPO, the purpose of which is to maximize the utility of the capitalists, lags behind the exit timing, whose purpose is to maximize social welfare. Using a numerical analysis, this paper also proves that increasing the production efficiency, lowering the interest rates, and improving risk management can make the exit decision of venture capitalists converge with that of maximizing social welfare.
Highlights
We will focus on a few practical problems: (1) Will the improvement in the production efficiency make the venture capitalist (VC) prefer going public or acquisition? (2) Will the improvement in the production efficiency delay the exit timing of the capital? (3) What would be the influence of risk management on the exit timing and exit mode? (4) What would be the influence of the discount rate on the exit timing and exit mode? (5) What would be the conflict and reconciliation between optimizing the investors’ utility and maximizing social welfare in a capital exit
Numerical Conclusion 2 shows that whether it is from the perspective of maximizing the utility of the VC or maximizing the overall value of the project, the improvement in the production efficiency, k, will encourage the VC to take initial public offering (IPO) as the final exit mode. erefore, improving production efficiency can alleviate the contradiction in the choice of the exit mode
We cannot conclude that low efficiency is conducive to resolving the contradiction of choosing an exit mode. e reasons for this are as follows: (i) UAVCC(T∗AC,VC) and E[ΠAalCl (T∗AC,all)] will decrease with the decrease in the efficiency, (ii) IPO is generally considered as a better way to exit [5], and (iii) it is difficult for inefficient venture enterprises to find acquirers
Summary
According to a study by He and Li [1], when a venture capital exits through M&A or IPO, the long-term value function of a project is different, and we can design an optimal equity incentive contract under M&A and IPO, respectively. Ere are various existing works that have focused on the timing of IPOs. In terms of building theoretical models, the current methods include the use of the real option theory to calculate the optimal stopping time [8,9,10, 21] and the use of the game theory to Complexity k 3 k 5 k 7 k 9 r.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
