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January  2021, 17(1): 369-392. doi: 10.3934/jimo.2019116

Angel capitalists exit decisions under information asymmetry: IPO or acquisitions

Chuan Ding , and  Da-Hai Li

The School of Economic Mathematics, Southwestern University of Finance and Economics, 611130, WenJiang, Chengdu, China

* Corresponding author: Chuan Ding

Received  January 2019 Revised  April 2019 Published  January 2021 Early access  September 2019

Fund Project: The authors acknowledge the financial support by the National Natural Science Foundation of China (No.71603212, No.71701164, No. 71671142), by Humanities and Social Science Project of Ministry of Education of China (14XJCZH001), by Soft Science Research Project of Sichuan Province (2017ZR0118), and by the Fundamental Research Funds for the Central Universities(JBK1903005,JBK1805001)

Angel capital is an important source of fund for start-ups. Based on the characteristics of angel investment market and the emotional factors between angel investor and entrepreneur, we establish two different principal-agent models to study their impact on different exit mechanisms i.e., IPO and acquisition. We find that: 1) In the case of IPO: as the entrepreneur's emotional factor increases, the optimal incentives decrease; but as the investor's emotional factor increases, the optimal incentives and the efforts increase. 2) When it comes to acquisitions: with the rising of entrepreneur's emotional factor, the optimal incentives decline; but the investor's emotional factor does not affect the optimal incentives and efforts. 3) Under certain conditions, the exit decision is influenced only by the entrepreneur's emotional factor. Moreover, IPO will be the best exit mechanism, only if the entrepreneur's emotional factor is greater than a unique threshold.

Keywords: Angel investment, contract design, withdrawal, emotional factors.
Mathematics Subject Classification: Primary: 90B50; Secondary: 91G50.
Citation: Chuan Ding, Da-Hai Li. Angel capitalists exit decisions under information asymmetry: IPO or acquisitions. Journal of Industrial & Management Optimization, 2021, 17 (1) : 369-392. doi: 10.3934/jimo.2019116
References:
[1]

O. Bayar and T. J. Chemmanur, IPOs versus acquisitions and the valuation premium puzzle: A theory of exit choice by entrepreneurs and venture capitalists, Journal of Financial and Quantitative Analysis, 46 (2011), 1755-1793.  doi: 10.1017/S0022109011000408.  Google Scholar

[2]

S. Bonini, V. Capizzi, M. Vallettab and P. Zocchi, Angel network affiliation and business angels' investment practices, Journal of Corporate Finance, 50 (2018), 592-608.  doi: 10.1016/j.jcorpfin.2017.12.029.  Google Scholar

[3]

J. C. Brau, B. Francis and N. Kohers, The choice of IPO versus takeover: Empirical evidence, The Journal of Business, 76 (2003), 583-612.  doi: 10.1086/377032.  Google Scholar

[4]

D. Cumming, Contracts and exits in venture capital finance, The Review of Financial Studies, 21 (2008), 1947-1982.  doi: 10.1093/rfs/hhn072.  Google Scholar

[5]

J. Cvitanić and J. F. Zhang, Contract Theory in Continuous-Time Models, Springer Finance. Springer, Heidelberg, 2013. doi: 10.1007/978-3-642-14200-0.  Google Scholar

[6]

P. Daniele, S. Giuffrè and S. Pia, Competitive financial equilibrium problems with policy interventions, Journal of Industrial and Management Optimization, 1 (2005), 39-52.  doi: 10.3934/jimo.2005.1.39.  Google Scholar

[7]

F. Englmaier and A. Wambach, Optimal incentive contracts under inequity aversion, Games and Economic Behavior, 69 (2010), 312-328.  doi: 10.1016/j.geb.2009.12.007.  Google Scholar

[8]

R. Elitzura and A. Gaviousb, Contracting, signaling, and moral hazard: A model of entrepreneurs, `angels, ' and venture capitalists, Journal of Business Venturing, 18 (2003), 709-725.  doi: 10.1016/S0883-9026(03)00027-2.  Google Scholar

[9]

R. Fairchild, An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach, Journal of Business Venturing, 26 (2011), 359-374.  doi: 10.1016/j.jbusvent.2009.09.003.  Google Scholar

[10]

S. He and C. W. Li, Human capital, management quality, and the exit decisions of entrepreneurial firms, Journal of Financial and Quantitative Analysis, 51 (2016), 1269-1295.  doi: 10.1017/s0022109016000363.  Google Scholar

[11]

T. Hellmann and V. Thiele, Friends or foes? The interrelationship between angel and venture capital markets, Journal of Financial Economics, 115 (2015), 639-653.  doi: 10.3386/w20147.  Google Scholar

[12]

B. Holmstrom and P. Milgrom, The firm as an incentive system, American Economic Review, 84 (1994), 972-991.   Google Scholar

[13]

L. A. Jeng and P. C. Wells, The determinants of venture capital funding: Evidence across countries, Journal of Corporate Finance, 6 (2000), 241-289.  doi: 10.1016/S0929-1199(00)00003-1.  Google Scholar

[14]

C. N. V. Krishnan, V. I. Ivanov, R. W. Masulis and A. K. Singh, Venture capital reputation, post-IPO performance and corporate governance, Journal of Financial and Quantitative Analysis, 46 (2011), 1295-1333.  doi: 10.1017/S0022109011000251.  Google Scholar

[15]

C. M. Mason and R. T. Harrison, Closing the regional equity capital gap: The role of informal venture capital, Small Business Economics, 7 (1995), 153-172.  doi: 10.1007/BF01108688.  Google Scholar

[16]

C. Mitteness, R. Sudek and M. S. Cardon, Angel investor characteristics that determine whether perceived passion leads to higher evaluations of funding potential, Journal of Business Venturing, 27 (2012), 592-606.  doi: 10.1016/j.jbusvent.2011.11.003.  Google Scholar

[17]

G. C. Murray and J. Lott, Have venture capital firms a bias against investment in high technology companies, Research Policy, 24 (1995), 283-299.   Google Scholar

[18]

P. Qian and W. Zhang, Returns on chinese venture capital investment and its determinants, Economic Research Journal (In Chinese), 5 (2007), 78-90.   Google Scholar

[19]

Y. Wang and Y. L. Rao, Principal-agent model of angel investment based on fairness theory, Systems Engineering (In Chinese), 27 (2009), 72-76.   Google Scholar

[20]

J. N. Wang, Y. Li and M. H. Liu, A study on the development tendency and strategies of angel investment in China, Science Research Management (In Chinese), 10 (2015), 161-168.   Google Scholar

[21]

X. L. Wang, Y. F. Lan and W. S. Tang, An uncertain wage contract model for risk-averse worker under bilateral moral hazard, Journal of Industrial and Management Optimization, 13 (2017), 1815-1840.  doi: 10.3934/jimo.2017020.  Google Scholar

show all references

References:
[1]

O. Bayar and T. J. Chemmanur, IPOs versus acquisitions and the valuation premium puzzle: A theory of exit choice by entrepreneurs and venture capitalists, Journal of Financial and Quantitative Analysis, 46 (2011), 1755-1793.  doi: 10.1017/S0022109011000408.  Google Scholar

[2]

S. Bonini, V. Capizzi, M. Vallettab and P. Zocchi, Angel network affiliation and business angels' investment practices, Journal of Corporate Finance, 50 (2018), 592-608.  doi: 10.1016/j.jcorpfin.2017.12.029.  Google Scholar

[3]

J. C. Brau, B. Francis and N. Kohers, The choice of IPO versus takeover: Empirical evidence, The Journal of Business, 76 (2003), 583-612.  doi: 10.1086/377032.  Google Scholar

[4]

D. Cumming, Contracts and exits in venture capital finance, The Review of Financial Studies, 21 (2008), 1947-1982.  doi: 10.1093/rfs/hhn072.  Google Scholar

[5]

J. Cvitanić and J. F. Zhang, Contract Theory in Continuous-Time Models, Springer Finance. Springer, Heidelberg, 2013. doi: 10.1007/978-3-642-14200-0.  Google Scholar

[6]

P. Daniele, S. Giuffrè and S. Pia, Competitive financial equilibrium problems with policy interventions, Journal of Industrial and Management Optimization, 1 (2005), 39-52.  doi: 10.3934/jimo.2005.1.39.  Google Scholar

[7]

F. Englmaier and A. Wambach, Optimal incentive contracts under inequity aversion, Games and Economic Behavior, 69 (2010), 312-328.  doi: 10.1016/j.geb.2009.12.007.  Google Scholar

[8]

R. Elitzura and A. Gaviousb, Contracting, signaling, and moral hazard: A model of entrepreneurs, `angels, ' and venture capitalists, Journal of Business Venturing, 18 (2003), 709-725.  doi: 10.1016/S0883-9026(03)00027-2.  Google Scholar

[9]

R. Fairchild, An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach, Journal of Business Venturing, 26 (2011), 359-374.  doi: 10.1016/j.jbusvent.2009.09.003.  Google Scholar

[10]

S. He and C. W. Li, Human capital, management quality, and the exit decisions of entrepreneurial firms, Journal of Financial and Quantitative Analysis, 51 (2016), 1269-1295.  doi: 10.1017/s0022109016000363.  Google Scholar

[11]

T. Hellmann and V. Thiele, Friends or foes? The interrelationship between angel and venture capital markets, Journal of Financial Economics, 115 (2015), 639-653.  doi: 10.3386/w20147.  Google Scholar

[12]

B. Holmstrom and P. Milgrom, The firm as an incentive system, American Economic Review, 84 (1994), 972-991.   Google Scholar

[13]

L. A. Jeng and P. C. Wells, The determinants of venture capital funding: Evidence across countries, Journal of Corporate Finance, 6 (2000), 241-289.  doi: 10.1016/S0929-1199(00)00003-1.  Google Scholar

[14]

C. N. V. Krishnan, V. I. Ivanov, R. W. Masulis and A. K. Singh, Venture capital reputation, post-IPO performance and corporate governance, Journal of Financial and Quantitative Analysis, 46 (2011), 1295-1333.  doi: 10.1017/S0022109011000251.  Google Scholar

[15]

C. M. Mason and R. T. Harrison, Closing the regional equity capital gap: The role of informal venture capital, Small Business Economics, 7 (1995), 153-172.  doi: 10.1007/BF01108688.  Google Scholar

[16]

C. Mitteness, R. Sudek and M. S. Cardon, Angel investor characteristics that determine whether perceived passion leads to higher evaluations of funding potential, Journal of Business Venturing, 27 (2012), 592-606.  doi: 10.1016/j.jbusvent.2011.11.003.  Google Scholar

[17]

G. C. Murray and J. Lott, Have venture capital firms a bias against investment in high technology companies, Research Policy, 24 (1995), 283-299.   Google Scholar

[18]

P. Qian and W. Zhang, Returns on chinese venture capital investment and its determinants, Economic Research Journal (In Chinese), 5 (2007), 78-90.   Google Scholar

[19]

Y. Wang and Y. L. Rao, Principal-agent model of angel investment based on fairness theory, Systems Engineering (In Chinese), 27 (2009), 72-76.   Google Scholar

[20]

J. N. Wang, Y. Li and M. H. Liu, A study on the development tendency and strategies of angel investment in China, Science Research Management (In Chinese), 10 (2015), 161-168.   Google Scholar

[21]

X. L. Wang, Y. F. Lan and W. S. Tang, An uncertain wage contract model for risk-averse worker under bilateral moral hazard, Journal of Industrial and Management Optimization, 13 (2017), 1815-1840.  doi: 10.3934/jimo.2017020.  Google Scholar

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Figure 2.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ \sigma _m = 5 $
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Figure 3.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ \sigma _m = 5 $
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Figure 4.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ {\sigma _m} = 5 $
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Figure 5.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ {\sigma _m} = 5 $
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U=v=u=r=0">Figure 6.  km=kg=5, c=G=I=10, U=v=u=r=0
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U=v=u=r=0, τ=0.5, kg=km=5, G=I=10">Figure 7.  U=v=u=r=0, τ=0.5, kg=km=5, G=I=10
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U=v=u=r=0, τ=0.5, kg=km=5, G=c=10">Figure 8.  U=v=u=r=0, τ=0.5, kg=km=5, G=c=10
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U=v=u=r=0, τ=0.5, kg=5, G=c=I=10">Figure 9.  U=v=u=r=0, τ=0.5, kg=5, G=c=I=10
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