Strategic Shareholders and IPO Disclosure: Evidence from Corporate Venture Capital

Abstract

This paper exploits the recent rise in corporate venture capitalists (CVC) to examine the effect of shareholders’ strategic incentives on firms’ IPO disclosure. CVCs’ investments are often driven by both financial and strategic incentives. I argue that, due to their strategic incentives, CVCs may influence their portfolio firms’ disclosure choices to protect proprietary information and avoid competitive harm not only to the portfolio firm but also to the CVC parent. Using a sample of venture capital (VC)-backed IPO firms from 1996 to 2014, I find that CVC-backed firms are more likely to redact material information in IPO prospectuses through confidential treatment orders than firms not backed by CVCs—the likelihood of redaction is 16% higher when a CVC is present. This result is robust to using propensity score matching and an instrumental variables approach. Furthermore, the disclosure effect is more pronounced for CVCs in the same industry as the portfolio firm, CVCs with a formal strategic partnership with the portfolio firm, and CVCs with fewer portfolio firms. These findings suggest that CVCs’ strategic incentives play an important role in their portfolio firms’ disclosure choices. CVC-backed firms are also more likely to redact information contained in agreements with collaborative partners, customers, or suppliers and in agreements associated with the CVC parents, which tend to contain proprietary information about the CVC. Taken together, this study offers new insights on how a previously unexplored factor—large shareholders’ strategic incentives—affects corporate disclosure decisions.