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

Financial Innovation

Yongwu Li¹  Shaolong Sun²  Yanzhao Li²  Ju-e Guo² 

[1] College of Economics and Management, Beijing University of Technology, No. 100, Ping Le Yuan, Chaoyang District, 100124, Beijing, China;School of Management, Xi’an Jiaotong University, No. 28, Xianning West Road, Beilin District, 710049, Xi’an, China;

关键词: Venture capital;    Time-inconsistent preferences;    Start-ups;    Exit decisions;    Real options;    G24;    D81;    G31;   

DOI  :  10.1186/s40854-021-00305-6

来源: Springer

【 摘 要 】

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.

【 授权许可】

CC BY