Venture Capital Finanace

Liquidity Risk and Venture Capital Finance Author(s): Douglas Cumming, Grant Fleming and Armin Schwienbacher Source: Financial Management, Vol. 34, No. 4 (Winter, 2005), pp. 77-105 Published by: Wiley on behalf of the Financial Management Association International Stable URL: http://www.jstor.org/stable/3666399 . Accessed: 18/12/2014 08:50

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Risk Liquidity Venture Capital

and Finance

Douglas Cumming, Grant Fleming, and Armin Schwienbacher*

This article provides theory and evidence in support of theproposition that venturecapitalists 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 entrepreneurialfirm in which the venture capitalist invests, and liquidity risk as the current and expectedfutureexternalexit marketconditions. Weshow that in timesof expectedilliquidity of exit markets (high liquidity risk), venture capitalists invest proportionately more in new high-techand early-stageprojects (high technologyrisk) in order topostpone exit requirements. Whenexit marketsare liquid, venture capitalists rush to exit by investing more...