How Does Competing Against Strategic Investors Alter the Signaling Role of Corporate Venturing Decisions?

This paper develops a signaling model to examine firms' corporate venturing decisions when the incumbent firm has private information about the quality of a project proposed by the current employee. Differing from the earlier studies, the analysis focuses on competition among firms, which are inherently strategic investors as the spillovers from the proposed project to their core businesses are crucial to their corporate venturing decisions. The signaling aspect of corporate venturing decisions provides the incumbent firm with an incentive to distort the implementation decision in order to conceal information from rival firms. The analysis shows that the presence of distortion depends primarily upon the opportunity cost of the employee not working in the firm's core business and the informational rents associated with the distortion in project implementation.