Private Equity Exit Choice Analysis Based On Corporate Governance Theory

Private equity fund did not show up in China for a long time, yet China has become a major private equity market worldwide with the high speed economic growth for decades. Private equity plays a significant role in capital optimization and resolving information asymmetry problem in small and medium sized enterprise financing. However, with its essence of capital appreciation, private equity fund has to withdraw money from invested companies to gain profit and raise fund for next rounds. Therefore, the analysis of private equity exit choice has importance, both in academics and reality.There has been abundant and thorough theoretical and empirical study of private equity exit choice globally, while the width and depth of domestic study remains unsophisticated. Actually, domestic studies have a narrow focus on qualitative comparison of various exit opportunities, neglecting quantitative analysis using theoretical model. This article starts from corporate governance theories, develops theoretical model based on information asymmetry that is private equity related and calculates the return formula of different exit choice under different regulation conditions. With the aim of maximizing exit return, we scrutinize the stock market premium driven by liquidity and the share holding of entrepreneurs upon exit as two most influential factors that have impacts on exit decisions of private equity investors. We use stock market liquidity and entrepreneur share holding ratio as inputs of empirical analysis, and reach the conclusion that:the increased stock market liquidity and enhanced entrepreneur share holding ratio make private equity investors more prone to exit through IPO rather than trade sells. Finally we summarized the article with suggestions on how to mitigate information asymmetry and exit method choice. Hopefully this article would provide some guidance to the practice.