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

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.

The persistence of family firms: How does performance threshold affect family firm exit?

Research on family firms provides mixed evidence of the effect of family ownership on firm performance and exit outcomes. Drawing on threshold theory and the socioemotional wealth perspective, we argue that family firms have lower performance thresholds than non-family firms, reducing the likelihood of firm exit. Using a longitudinal dataset of 1191 firms over the period 2008–2011, we find support for this contention, suggesting that performance threshold is an important, yet poorly studied, construct for understanding exits of family versus non-family firms.Plain English Summary Why firms with similar economic performance make different exit decisions? We find evidence that family firms have lower “performance thresholds” than non-family firms, reducing family firms’ likelihood of exit. Using a longitudinal dataset, we examine differences in performance threshold between family and non-family firms and help clarify why some firms persist with their ventures even though their performance may indicate they should exit the market. Our theory and related findings suggest that nonfinancial attributes such as identity, the ability to exercise family influence, and to hand the business down to future generations may affect family firms’ attitudes toward exit decisions. Our study contributes to sharpening our understanding of exit in family firms while motivating future work on exit strategies in family firms and other contexts.

Misallocation and reallocation of resources in Vietnamese manufacturing firms

PurposeThis research identifies the level of misallocation in Vietnamese manufacturing sector for the period 2000–2015. Meltiz and Polanec dynamic productivity decomposition is used to compare the relative productivity contributions from surviving, entering and exiting firms to aggregate productivity change by the type of ownership. Heckman's two-step model is used to examine the effect of misallocation and industry- and firm-level factors on entry or exit decision and market share of firms in Vietnamese manufacturing sector.Design/methodology/approachThe level of misallocation and efficiency gains in total factor productivity (TFP) are assessed using Hsieh and Klenow (2009) productivity decomposition framework for the period 2000–2015. The dynamic productivity decomposition of Meltiz and Polanec (2015) is used to compare the relative contributions from surviving, entering and exiting firms to aggregate productivity change. The effects of misallocation and other factors on entry or exit decisions and market share of firms are determined by using Heckman choice model.FindingsThe results indicate three main points. Firstly, resource misallocation is found to be highest among state-owned enterprise (SOEs) and low technology industries. TFP is found to 81.2% greater if there is no resource misallocation among firms. Secondly, the aggregate productivity change for the entering, exiting and surviving firms is 35% due to productivity reallocation among three groups. Finally, the decision of entry or exit as well as the market share of firms are influenced by misallocation and industry- and firm-level factors such as Vietnam's WTO entry, tax policy, financial frictions, industrial concentration, technology gap, capital intensity, human capital, scale of firm, time entry and FDI spillovers. The result finds the higher misallocation level is, the lower the probability and market share for a new firm to enter in the industry is.Research limitations/implicationsThe main limitation of the study is that the market is assumed perfectly competitive and the method has only decomposed misallocation of resources to those arising from output and capital distortions. The results of Heckman choice model only clarify on the sub-sample of state-owned enterprises and low technology firms.Originality/valueThe focus of many previous research papers on resource misallocation was generally to look at the level of misallocation in developed countries. However, knowledge about the effect of misallocation and other factors on entry or exit decisions and market share of firms is limited, particularly in the context of developing countries. This paper clarifies the level of misallocation in Vietnamese manufacturing sector and the effect of misallocation and other factors on entry or exit decisions and market share of firms.