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

Abstract

When employees in publicly listed firms in the US personally invest in start-ups, a firm's innovation output decreases by 3% - 5%. We establish this finding exploiting novel data that links angel investors in the US to their employment history. These results are robust to various potential selection effects and omitted variables. The negative relationship is stronger when angel employees have more incentives to get involved in their investments. Start-ups financed by angel investors who are employed at listed firms are associated with higher future success compared to those financed by other angel investors. Overall, our results indicate that angel investors divert time and effort from their employers to their personal investments.

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

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