Corporate Venture Capital, Competition, and Valuation in the Acquisition Market: Evidence from the Biopharmaceutical Industry

Abstract

We investigate the function of corporate venture capital and associated competition in relation to biopharmaceutical acquisitions. We document that corporate investors, which had previously invested in target firms acquired by third parties, contribute to the increase in abnormal returns for the acquirers’ and target firms’ shareholders upon the announcement of acquisitions. Evidence suggests that this contribution is realized through corporate investors’ preemptive selection of promising technology partners and by providing positive signals about the quality of portfolio firms to the investor community. We also document that corporate investors indicate greater abnormal returns than acquirers and potential competitors upon the announcement of acquisitions. We find evidence that corporate investors benefit from the attenuation of competitive pressure that comes with acquisitions while acquirers bear the cost of acquisitions. This attenuation effect is limited to corporate investors and acquirers; it does not affect potential competitors. Corporate investors, however, obtain considerably less abnormal returns when acquirers possess sufficient capacities to compete against them and share the same technology domains with them.