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No Exit: Failure to Exit Under Uncertainty

For any business, delayed exits pose substantial economic problems. Even though many companies tend to hold on to their assets, studies have shown that returns would triple if VCs exited ventures at the right time and shareholder value could increase as much as 13.6% should corporations divest underperforming business units optimally.

Anne Marie Knott recently co-authored a research paper with Dan Elfenbein entitled, “No Exit: Failure to Exit Under Uncertainty.” They examine the private costs of excess entry and study whether social welfare can be improved by expediting the exit of would-be failures. As predicted, their results show that there are substantial economic gains to improving exit decisions. In essence, their research paper provides the mathematical support to prove the value of exiting the market at optimal times.

The general topic of her current paper is in entrepreneurial exit, but the problem they are trying to alleviate is actually much broader, as these types of exits occur frequently. For example, firms exit markets, business units and products, close plants and abandon R&D projects, while venture capitalists exit ventures, employees leave firms and individuals sell stock. Quite simply, exits influence much of the market, as do entrepreneurial entries.




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