A Dark Side of Corporate Venture Capital

Abstract

We examine a dark side of corporate venture capital (CVC) programs. Relying on plausibly exogenous variation in passive institutional ownership generated by Russell 1000/2000 index reconstitutions, we show that firms with larger passive institutional ownership cut their CVC investment. This effect is more pronounced for firms with severer managerial agency problems. Further tests show that passive institutional investors induce firms to cut CVC investment in startups that are unrelated to the firms’ core businesses and are of low quality, and when firms have poor track record on CVC investment. By doing so, firm value increases. Our paper uncovers a previously under-explored dark side of CVC programs, their giving rise to managerial agency problems, and helps provide a more complete picture when evaluating CVC programs.

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

JEL Classification: G24, G23, G30