Question

1. Explain how venture capital (VC) funds finance private businesses, as well as how they exit from the participation.
2. How do you think accounting irregularities affect the pricing of corporate stock in general? From an investor’s viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities?

Answer 1

Venture capital are generally investing in the start-up businesses by acquiring a stake in the business as equity shareholders and they will be trying to invest in these startups in order to gain huge sum of money when the startup will be becoming large and they will be exiting through initial public offering in the market or they will be selling to other venture capitalists.

Venture capital is a form of equity financing for startup businesses which will be providing with higher sum of money for Risk taking businesses and this venture capitalist are also risk loving investors so they will be trying to acquire a large stake in a smaller startups businesses and they will also be trying to interfere in the business in order to maximize the value of their investment through their specialisation in managing various business affairs and they will be helping the the business owners to maximize their value.

Once the investor feels that value has been maximized and he has raised his potential capital appreciation target then he will be selling his entire stage and he will be selling it through private placement routes or he can also offer it in a initial public offering or he may be selling out to another venture capitalists.

Accounting irregularities can lead to to use price down fall in the market if these irregularities are done in order to inflate the books of account like we can see in case of Enron,so irregularities when they will be found out by the investor, they will be e pricing this risk of misappropriation and window dressing in their stock prices and share price will be falling because it is a negligence on the part of the management.

From the investor points of view investor should be trying to proactively look upon the management targets and he should be trying to go through the books of accounts and he should be always aware about the estimations of the company and annual reports and financial statements so he should be proactively trying to judge the performance of the company and match it with the books of account so he will be able to understand the operations of a company in a better way and rational investor who is aware can make better decisions and protect his capital from fall in the prices of assets due to corporate negligence