Abstract

The management literature has suggested that corporate venture capital (CVC) creates firm value, particularly when technological firms target entrepreneurial ventures (Dushnitski & Lenox, 2005). Particularly, corporations can use CVC investments to build options to acquire entrepreneurial companies if their technologies are proven strategically valuable. However, the finance literature has found that CVC-backed acquisitions in general generate negative returns due to agency problems (Benson & Ziedonis, 2005). Thus, it deserves further investigation on how to mitigate agency problems in such transactions so that corporate investors could fully utilize strategic benefits associated with CVC investments. In this study, we examine several factors which may enhance the performance of CVC backed acquisitions. In general, we believe corporate investors may use CVC investments to obtain toehold positions prior to subsequent additional equity investments for an ultimate takeover. Such toehold positions and sequential investment strategies will help overcome asymmetric information. In addition, corporate investors may pay attention to the timing of acquisitions, the location proximity, and business relatedness of portfolio companies. These factors would help corporate investors monitor business operation of portfolio companies and also contribute toward reduce information asymmetry.

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