American Institute of Mathematical Sciences

Advanced
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  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, 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

Figure 1.  The Time Line
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 2.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ \sigma _m = 5 $
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 3.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ \sigma _m = 5 $
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 4.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ {\sigma _m} = 5 $
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 5.  $ \mathop U\limits^ - = v = u = r = 0 $, $ \rho = 0.5 $, $ {k_g} = {k_m} = 5 $, $ {\sigma _m} = 5 $
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 6.  km=kg=5, c=G=I=10, U=v=u=r=0
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 7.  U=v=u=r=0, τ=0.5, kg=km=5, G=I=10
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 8.  U=v=u=r=0, τ=0.5, kg=km=5, G=c=10
Figure Options

Download full-size image

Download as PowerPoint slide

Figure 9.  U=v=u=r=0, τ=0.5, kg=5, G=c=I=10
Figure Options

Download full-size image

Download as PowerPoint slide

[1]

Kegui Chen, Xinyu Wang, Min Huang, Wai-Ki Ching. Salesforce contract design, joint pricing and production planning with asymmetric overconfidence sales agent. Journal of Industrial & Management Optimization, 2017, 13 (2) : 873-899. doi: 10.3934/jimo.2016051
[2]

Monika Joanna Piotrowska, Joanna Górecka, Urszula Foryś. The role of optimism and pessimism in the dynamics of emotional states. Discrete & Continuous Dynamical Systems - B, 2018, 23 (1) : 401-423. doi: 10.3934/dcdsb.2018028
[3]

Jeff Musgrave, James Watmough. Examination of a simple model of condom usage and individual withdrawal for the HIV epidemic. Mathematical Biosciences & Engineering, 2009, 6 (2) : 363-376. doi: 10.3934/mbe.2009.6.363
[4]

Jun Wu, Shouyang Wang, Wuyi Yue. Supply contract model with service level constraint. Journal of Industrial & Management Optimization, 2005, 1 (3) : 275-287. doi: 10.3934/jimo.2005.1.275
[5]

Cristian Morales-Rodrigo. A therapy inactivating the tumor angiogenic factors. Mathematical Biosciences & Engineering, 2013, 10 (1) : 185-198. doi: 10.3934/mbe.2013.10.185
[6]

Thomas Jordan, Mark Pollicott. The Hausdorff dimension of measures for iterated function systems which contract on average. Discrete & Continuous Dynamical Systems - A, 2008, 22 (1&2) : 235-246. doi: 10.3934/dcds.2008.22.235
[7]

Ridouan Bani, Rasheed Hameed, Steve Szymanowski, Priscilla Greenwood, Christopher M. Kribs-Zaleta, Anuj Mubayi. Influence of environmental factors on college alcohol drinking patterns. Mathematical Biosciences & Engineering, 2013, 10 (5&6) : 1281-1300. doi: 10.3934/mbe.2013.10.1281
[8]

Antoni Ferragut, Jaume Llibre, Adam Mahdi. Polynomial inverse integrating factors for polynomial vector fields. Discrete & Continuous Dynamical Systems - A, 2007, 17 (2) : 387-395. doi: 10.3934/dcds.2007.17.387
[9]

Fangzhou Cai, Song Shao. Topological characteristic factors along cubes of minimal systems. Discrete & Continuous Dynamical Systems - A, 2019, 39 (9) : 5301-5317. doi: 10.3934/dcds.2019216
[10]

Jérôme Buzzi. The degree of Bowen factors and injective codings of diffeomorphisms. Journal of Modern Dynamics, 2020, 16: 1-36. doi: 10.3934/jmd.2020001
[11]

K.F. Gurski, K.A. Hoffman, E.K. Thomas. Modeling HIV: Determining the factors affecting the racial disparity in the prevalence of infected women. Conference Publications, 2015, 2015 (special) : 569-578. doi: 10.3934/proc.2015.0569
[12]

Marianna Euler, Norbert Euler. Integrating factors and conservation laws for some Camassa-Holm type equations. Communications on Pure & Applied Analysis, 2012, 11 (4) : 1421-1430. doi: 10.3934/cpaa.2012.11.1421
[13]

Kenichi Fujishiro, Yavar Kian. Determination of time dependent factors of coefficients in fractional diffusion equations. Mathematical Control & Related Fields, 2016, 6 (2) : 251-269. doi: 10.3934/mcrf.2016003
[14]

Farzaneh Ahmadzadeh, Kathrina Jederström, Maria Plahn, Anna Olsson, Isabell Foyer. An investigation of the most important factors for sustainable product development using evidential reasoning. Numerical Algebra, Control & Optimization, 2017, 7 (4) : 435-455. doi: 10.3934/naco.2017027
[15]

Xiulan Wang, Yanfei Lan, Wansheng Tang. An uncertain wage contract model for risk-averse worker under bilateral moral hazard. Journal of Industrial & Management Optimization, 2017, 13 (4) : 1815-1840. doi: 10.3934/jimo.2017020
[16]

Xiaojiao Tong, Felix F. Wu, Jifeng Su. Quadratic approximation and visualization of online contract-based available transfer capability region of power systems. Journal of Industrial & Management Optimization, 2008, 4 (3) : 553-563. doi: 10.3934/jimo.2008.4.553
[17]

Fengjun Wang, Qingling Zhang, Bin Li, Wanquan Liu. Optimal investment strategy on advertisement in duopoly. Journal of Industrial & Management Optimization, 2016, 12 (2) : 625-636. doi: 10.3934/jimo.2016.12.625
[18]

Ming Yang, Chulin Li. Valuing investment project in competitive environment. Conference Publications, 2003, 2003 (Special) : 945-950. doi: 10.3934/proc.2003.2003.945
[19]

Adrien Nguyen Huu. Investment under uncertainty, competition and regulation. Journal of Dynamics & Games, 2014, 1 (4) : 579-598. doi: 10.3934/jdg.2014.1.579
[20]

Xin Jiang, Kam Chuen Yuen, Mi Chen. Optimal investment and reinsurance with premium control. Journal of Industrial & Management Optimization, 2017, 13 (5) : 1-17. doi: 10.3934/jimo.2019080

2018 Impact Factor: 1.025

Tools

Metrics

  • PDF downloads (53)
  • HTML views (151)
  • Cited by (0)

Other articles
by authors

[Back to Top]

Copyright © 2019 American Institute of Mathematical Sciences