Liquidity Risk and Venture Capital Finance
Financial Management, Vol. 34, No. 4, Winter 2005
30 Pages Posted: 10 Nov 2005
There are 2 versions of this paper
Liquidity Risk and Venture Capital Finance
Abstract
This paper provides theory and evidence in support of the proposition that venture capitalists adjust their investment decisions according to liquidity conditions on IPO exit markets. We refer to technological risk as a choice variable in terms of the characteristics of the entrepreneurial firm in which the venture capitalist invests, and liquidity risk as the current and expected future external exit market conditions. We show that in times of expected illiquidity of exit markets (high liquidity risk), venture capitalists invest proportionately more in new high-tech and early-stage projects (high technology risk) in order to postpone exit requirements. When exit markets are liquid, venture capitalists rush to exit by investing more in later-stage projects. We further provide complementary evidence that shows conditions of low liquidity risk give rise to less syndication. Our theory and supporting empirical results facilitate a unifying theme that links related research on illiquidity in private equity.
Keywords: Private Equity, Venture Capital, Liquidity Risk
JEL Classification: G24, G28, G31, G32, G35
Suggested Citation: Suggested Citation
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