Corporate venture capital, disclosure, and financial reporting

• Published date: 01 November 2021
• Author: Sophia J. W. Hamm,Michael J. Jung,Min Park
• Date: 01 November 2021
• DOI: http://doi.org/10.1111/corg.12379

ORIGINAL ARTICLE

Corporate venture capital, disclosure, and financial reporting

Sophia J. W. Hamm

1

| Michael J. Jung

2

| Min Park

3

1

A. B. Freeman School of Business, Tulane

University, New Orleans, Louisiana, USA

2

Alfred Lerner College of Business and

Economics, University of Delaware, Newark,

Delaware, USA

3

School of Business, University of Kansas,

Lawrence, Kansas, USA

Correspondence

Michael J. Jung, Alfred Lerner College of

Business and Economics, University of

Delaware, 42 Amstel Ave, Newark, DE 19716,

USA.

Email: mjung@udel.edu

Funding information

Ohio State University

Abstract

Research Question/Issue: Corporate venture capital (CVC) is one of the most impor-

tant avenues for corporate innovation today, yet there can be unintended conse-

quences related to anticompetitive practices. Recent scrutiny from regulators and

policymakers underscores their growing desire for more information about firms'

CVC investment activities, even of those previously believed to be too small to

matter.

Research Findings/Insights: Using a comprehensive sample of 115 publicly listed US

parent firms that owned 133 CVC firms, we document that for almost half of the

firm-years in our sample, parent firms do not disclose any information about their

CVC program. Among the parent firms that do disclose their CVC activities, we find

that they disclose less when they make investments in industries outside of their core

industry. Firms with a CVC program, relative to similar firms without a CVC program,

tend to make more future acquisitions and report less future goodwill asset write-

downs.

Theoretical/Academic Implications: Variation in details of CVC disclosures

explained by within-industry versus outside-industry investments is consistent with

theories on voluntary/discretionary disclosure. Future research can examine other

characteristics of CVC investments that explain how parent firms report their CVC

activities.

Practitioner/Policy Implications: This study documents the current state of affairs

with respect to the amount of publicly available CVC information for a large sample

of firms, an important starting point for regulators and policymakers to conduct an

informed debate about whether disclosure requirements should be expanded. Our

focus on investment disclosures can apply to other settings in which the investing

public could benefit from greater transparency, such as Special Purpose Acquisition

Companies (SPACs).

KEYWORDS

corporate governance, acquisitions, corporate venture capital, disclosure, financial reporting

1|INTRODUCTION

We examine firms' corporate venture capital (CVC) investing activities

from a disclosure and financial reporting perspective. CVC refers to

minority equity investments made by established, publicly listed firms

in privately held entrepreneurial ventures (Gompers & Lerner, 2000).

CVC investing differs from pure venture capital investing in that finan-

cial returns are not the primary consideration, but rather, strategic

gains are often the driving motivation to invest. The investing firm

gets access to new sources of innovation and potential acquisition tar-

gets, and the startup venture benefits from the established firm's

capital, expertise, and connections (The Economist,2014). While

Received: 10 July 2020 Revised: 9 April 2021 Accepted: 16 April 2021

DOI: 10.1111/corg.12379

Corp Govern Int Rev. 2021;29:541–566. wileyonlinelibrary.com/journal/corg © 2021 John Wiley & Sons Ltd 541

established firms in the technology, industrial, and healthcare sectors

such as Google, General Electric, and Johnson & Johnson have set up

CVC subsidiaries to invest billions of dollars in startups, younger firms

such as Twitter with relatively smaller cash balances are starting to do

so as well (Koh, 2015; Levy, 2015).

However, critics note several potential drawbacks to CVC

investing (Brooker, 2015). Each time there is a market bust, many par-

ent firms pull out of the CVC market, close the startups, and write off

the investments. There can also be a conflict of interest regarding

whether the CVC subsidiary's loyalty lies with the “parent”or startup.

1

Startups can be wary of incumbents seeking to gather intelligence to

compete against them. The Wall Street Journal recently interviewed

more than two dozen entrepreneurs and startup investors who allege

that Amazon, parent of its CVC subsidiary Alexa Fund, launched com-

peting products against startups in which Alexa Fund invested in or

simply met with (Mattioli & Lombardo, 2020). Not coincidentally, the

Federal Trade Commission (FTC) began a probe into Amazon and four

other large tech firms seeking previously undisclosed information

about their past acquisitions, which at the time were too small to trig-

ger antitrust review. The FTC also sought information about the firms'

minority equity investments in startups to assess whether these

behaviors were harmful to competition and whether disclosure and

antitrust review requirements should be broadened (McKinnon &

Seetharaman, 2020). Moreover, a US House antitrust subcommittee

released a 450-page report (US House Committee on the

Judiciary, 2020) that found, among other things, several tech firms

“surveilled other businesses to identify potential rivals, and have ulti-

mately bought out, copied, or cut off their competitive threats.”The

report also proposes to limit these firms' future acquisitions of, and

investments in, startups. These high-profile events underscore the

growing desire of regulators and policymakers for more information

about firms' CVC investment activities, even of those previously

believed to be too small to matter.

The question of whether publicly listed firms should disclose more

information about their acquisitions and minority equity investments

in general, and CVC investments in particular, falls under theories of

strategic and voluntary disclosure. Greater disclosure reduces informa-

tion asymmetry between firm managers and investors, which reduces

a firm's cost of capital (Diamond & Verrecchia, 1991). But there are

costs to disclosure, including revealing information that would be use-

ful to a firm's competitors (Verrecchia, 1983). Proprietary information

such as a firm's investments in innovation and future technologies

would appear to be better left undisclosed to competitors for as long

as practical, yet firms may want to signal their innovative prowess to

investors by voluntarily disclosing selective investments in innovation

(Bhattacharya & Ritter, 1983). The recent scrutiny from regulators and

policymakers appears to put the additional pressure on firms with a

CVC program to be more transparent and to show that they are not

engaging in anticompetitive behavior through their CVC activities. This

onus would alter the traditional tradeoff between disclosing informa-

tion to investors and withholding information from competitors.

Motivated by these recent developments, as well as the growing

size of the CVC industry in the past decade, we examine (1) the types

of disclosures that parent firms provide about their CVC activities,

(2) factors that explain variation in the detail of disclosures, and

(3) how current CVC activities are associated with future acquisitions

and acquisition-related financial reporting.

Historically, since the 1960s, CVC was a niche subset of corpo-

rate investments with unclear goals, which rose and declined in waves

based on booms and busts of the stock market (see Fan, 2018, for a

comprehensive review). However, in the past decade, the CVC indus-

try has matured in terms of size, reach, and strategic intent. According

to data from CB Insights, US parent firms in 2017 invested $18.8 bil-

lion through their CVC subsidiaries in 847 deals that accounted for

nearly one fifth of overall venture capital deals. Globally, the number

of CVC deals has nearly doubled, and dollars invested have tripled

between 2013 and 2017, while the traditional VC industry has consol-

idated (Mawson, 2016). Parent firms, through their CVC subsidiaries,

now get involved in early stages of startups both within their core

industry as well as outside industries, designate board members,

gather market intelligence on competitive threats, and respond quickly

to market disruptions. The CVC setting is an active one for scholars in

the finance, management, and legal fields to study (e.g., Basu

et al., 2011; Fan, 2018; Ma, 2020).

Using hand-collected data from 1996 to 2017 on a comprehen-

sive sample of 115 publicly listed US parent firms that owned

133 CVC firms, we document that for almost half of the firm-years in

our sample, parent firms do not disclose any information about their

CVC program. Surprisingly, despite thousands of startups that

announce receiving venture financing from the CVC subsidiaries of

well-known, publicly listed firms, most of those investing firms never

mention the financing activities in their 10-K or 8-K filings with the

Securities and Exchange Commission (SEC), press releases, or corpo-

rate websites. Among the parent firms that do disclose their CVC

activities, there is much time-series and cross-sectional variation in

the amount and detail of disclosures. We test for the determinants of

variation in firms' level of disclosure and find that firms disclose less

information about their CVC activities when they make investments

in industries outside of their core industry, consistent with theories of

discretionary disclosure (Verrecchia, 1983).

We then examine whether having a CVC program is associated

with future acquisitive behavior. The rationale is that if the goal of

CVC investing is strategic gain, rather than pure financial returns, then

one avenue for strategic gain is through future acquisitions. Even if

future acquisitions are not of CVC investees specifically, an associa-

tion would suggest that CVC investing may be one element of a firm's

acquisition strategy. We find that relative to control firms without a

CVC program, firms with a CVC program make a greater number of

acquisitions over future 3-year periods. We believe these findings

suggest that firms with a CVC program have more awareness of and

access to acquirable technologies.

In our next set of analyses, we do not find that parent firms with

a CVC program spend significantly more cash outlays for acquisitions

or experience more buildup of goodwill and intangibles than control

firms, which suggests that either cash is not the primary form of con-

sideration, the acquisitions are relatively small, or both. We believe

542 HAMM ET AL.