The role of corporate venture capital on returns to acquiring firms: evidence from the biotechnology industry

Corporate venture capital (CVC) firms face considerable uncertainty while investing time, capital, and other resources in their portfolio firms, typically entrepreneurial ventures. The absence of unambiguous measures of performance about the portfolio firm's prospects for success and longevity typically is at the root of such uncertainty. Prior research, based on the literature on inter-organizational endorsements grounded in the institutional theory, focused on returns to the portfolio firms under such conditions of uncertainty. We, on the other hand, test the hypotheses that the "prominence" of a CVC firm and the presence of a "prior investment" in the portfolio firm serve as endorsements and the acquiring firms, as endorsers, earn positive financial returns. Results from a sample of biotechnology acquisitions, using an event study methodology for capturing the cumulative abnormal returns (CARs) to acquisition announcements and ordinary least squares regressions (OLS) to study the determinants of the CARs, support the hypotheses.