A Dark Side of Corporate Venture Capital

46 Pages Posted: 12 Sep 2018 Last revised: 1 Oct 2018

See all articles by Xuan Tian

Xuan Tian

Tsinghua University - PBC School of Finance

Kailei Ye

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: August 31, 2018

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

Suggested Citation

Tian, Xuan and Ye, Kailei, A Dark Side of Corporate Venture Capital (August 31, 2018). Available at SSRN: https://ssrn.com/abstract=3241866 or http://dx.doi.org/10.2139/ssrn.3241866

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Kailei Ye (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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