The relationship between portfolio diversification and firm value: The evidence from corporate venture capital activity

Authors

  • Yi Yang,

    Corresponding author
    1. Department of Management, Manning School of Business, University of Massachusetts Lowell, Lowell, Massachusetts, U.S.A.
    • Correspondence to: Yi Yang, Department of Management, University of Massachusetts Lowell, Falmouth 207G, One University Avenue, Lowell, MA 01854, U.S.A. E-mail: yi_yang@uml.edu

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  • Vadake K. Narayanan,

    1. Department of Management, LeBow College of Business, Drexel University, Philadelphia, Pennsylvania, U.S.A.
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  • Donna M. De Carolis

    1. Close School of Entrepreneurship, Philadelphia, Pennsylvania, U.S.A.
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Abstract

Corporate venture capital (CVC) activity exposes firms to new technologies and markets. An important but as yet unexplored question is the relationship of the industry diversification profile of the portfolio of venture companies to corporate value creation. Insights from options and diversification perspectives support our hypothesis that diversification of a corporate investor's portfolio of venture companies is related to corporate wealth creation in a U-shaped relationship. We also propose that a corporate investor's financial constraints moderate the relationship between the diversification profile of its CVC portfolio and value creation. When we tested our hypotheses using a sample of CVC investments across multiple industries, we found support for them, and these findings may inform the CVC activities of corporate investors. Copyright © 2013 John Wiley & Sons, Ltd.

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