Corporate Finance Game Analysis

In the recent few years, venture capital in China has become more and more popular. A great number of high potential companies came out. This paper is to study and analyze the relationship between all parties in the process of investment. The academic mechanism of this paper is game theory.According to different series of the company financing, this paper analyzes the relationship among the entrepreneur, first round investor and the later round investor. In the first round of company financing, if the risk of disclosure the internal information of the company is too high, which will lead to a high lose, the company will not consider a financing. Due to the information asymmetry, investors don't know the exact value of the company. Investor will judge the value of the company according to the expected revenue. In the later round of company financing, two circumstances are considered. The first is under the condition of non-conspiracy. Investor will decide weather to make an investment according to the potential growth of the company and the probability of that kind of growth. This paper analyzes the data of VC and PE in 2007 and found that the gap between VC and PE is gradually vanishing because of the severe competition and the decreasing number of good companies. That means the investments are becoming more and more concentrated in the companies with high probability of IPO but comparatively lower return. This article also analyzed the behavior of all partied under conspiracy condition. Conspiracy between later round investor and entrepreneur will occur even entrepreneur may lose benefits because entrepreneur need a power balance. First round investor and later round investor will make a conspiracy in order to control the IPO and capital operation of the company. Entrepreneur and first round investor will also make a conspiracy to attract investment from later round investor.Case study of this article analyzes and proves the conspiracy between entrepreneur and investor. Entrepreneur should consider the controlling power of the investor in the process of IPO. First round investor alod need to prevent the conspiracy between entrepreneur and later round investor from happening to protect the benefit.