A Dark Side of Corporate Venture Capital

Abstract

We examine a dark side of corporate venture capital (CVC) programs via the lens of institutional investors, although the existing literature generally finds CVC programs benefit both the parent firms and startups. Relying on plausibly exogenous variation in institutional ownership generated by annual reconstitutions of Russell 1000 and 2000 indexes, we show that an increase in institutional ownership is associated with a cut in firms’ CVC investment. This effect is more pronounced for firms that are subject to more serious managerial agency problems. Further tests show that institutional investors induce firms to cut CVC investment in startups that are unrelated to the firms’ core business and are of low quality as well as when firms have poor track record on CVC investment. By doing so, both short-term and long-term firm value increases. Our paper uncovers a previously under-explored dark side of CVC programs – their giving rise to managerial agency problems.

Keywords: Corporate venture capital, institutional investors, agency problem, firm value

JEL Classification: G24, G23, G30