Angels and Demons: The Negative Effect of Employees' Angel Investments on Corporate Innovation

Abstract

We link data on angel investors in the US to their employment history and show that employers’ innovation output decreases when their employees personally invest in start-ups. Our evidence is consistent with agency conflicts as the reason for lower innovation output. Angel investors divert time and effort from their employer to their personal investments. The effects are more pronounced when angel investments offer stronger financial incentives. In contrast, start-ups benefit from financing by angel investors employed at public firms. We highlight a trade-off between the benefits of angel investors for start-ups and the costs for their employer.

Keywords: Innovation, Angel Investors, Human Capital, Agency Conflicts, Distraction

JEL Classification: G24, G30, O30, O31, O32