Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by post-IPO firms

JBR-08563; No of Pages 11 Journal of Business Research xxx (2015) xxx–xxx

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Journal of Business Research

Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by post-IPO firms Arvin Sahaym a, Sam Yul Cho b, Sang Kyun Kim c,⁎, Fariss-Terry Mousa d a

Department of Management, Information Systems and Entrepreneurship, Washington State University, Pullman, WA 99164-4736, United States Department of Strategy and Entrepreneurship, College of Business, Oregon State University, Corvallis, OR 97331, United States Department of Human Resource and Organization, School of Business, Sungkyunkwan University, Seoul 110-745, Republic of Korea d Department of Management, College of Business, James Madison University, Harrisonburg, VA 22807, United States b c

a r t i c l e

i n f o

Article history: Received 7 May 2014 Received in revised form 19 September 2015 Accepted 24 September 2015 Available online xxxx Keywords: Corporate venture capital Top management team Board of directors Governance Ownership Post-IPO entrepreneurial firms

a b s t r a c t This study examines the role of the top management team (TMT) and governance structures in the use of corporate venture capital (CVC) in firms that have recently undergone an initial public offering (IPO). The study is unique in that it sheds light on governance-related antecedents of strategic decision making in such firms. We integrate the insights of behavioral agency and upper echelon perspectives to develop our hypotheses. Our results show that in the presence of non-duality, a negative curvilinear relationship exists between TMT heterogeneity and the use of CVC. We also find that TMT heterogeneity and ownership motivate the use of CVC but only up to a certain threshold. Our findings contribute to the literatures of entrepreneurship and strategy. © 2015 Elsevier Inc. All rights reserved.

1. Introduction Corporate venture capital (CVC) is gaining prominence as a key mode in the search for new competencies (Covin & Miles, 2007; Phan, Wright, Ucbasaran, & Tan, 2009), especially as it involves minority investments to facilitate the development of businesses outside organizational boundaries to achieve strategic objectives (Dushnitsky & Lenox, 2005; Gompers & Lerner, 2001). Firms in a number of industries have searched for new competencies using CVC and prior research has established that CVC contributes to firm innovation, growth, and value, particularly in the high technology sectors (Dushnitsky & Lenox, 2005; Narayanan, Yang, & Zahra, 2009; Phan et al., 2009). The use of CVC is inherently risky although it can facilitate the discovery of new technologies based on capabilities that differ substantially from a firm's existing routine (Basu, Phelps, & Kotha, 2011; Sahaym, Steensma, & Barden, 2010). The decision to use CVC for diverse strategic objectives1 can stretch top management beyond ⁎ Corresponding author. E-mail addresses: [email protected] (A. Sahaym), [email protected] (S.Y. Cho), [email protected] (S.K. Kim), [email protected] (F.-T. Mousa). 1 Prior research (e.g., Basu et al., 2011; Dushnitsky & Lenox, 2006; Sahaym et al., 2010) has identified a number of strategic objectives for CVC investments including the search for new technologies, catching up with technological breakthroughs by other firms, learning about innovations through new ventures in diverse sectors and considering them for acquisition, developing eco-systems for core products by investing in complementary innovations and distribution channels, strategic renewal, and developing entrepreneurial cultures, among others.

its comfort zone, particularly when a firm has recently gone public (that is, offered its stock for the first time in order to move from private to public ownership) (Krishnan, Ivanov, Masulis, & Singh, 2011; Maula, Keil, & Zahra, 2003). For firms that have recently undergone an initial public offering (IPO'd or post-IPO firms), CVC presents a behavioral agency dilemma (Bruton, Filatotchev, Chahine, & Wright, 2010; Makri, Lane, & Gomez-Mejia, 2006). As management teams in IPO'd firms contemplate the use of CVC for diverse strategic objectives, a mixed gamble situation arises. These management teams find themselves weighing the potential gains and losses of exploring versus maintaining the status quo, particularly in terms of risks to their own employment and compensation (Gao & Jain, 2012; Martin, Wiseman, & Gomez-Mejia, 2013). In the early years following IPO, top managers may be inclined to avoid risk associated with the search for new technologies, potential acquisitions, or investing in complementary businesses (Kroll, Walters, & Le, 2007; Walters, Kroll, & Wright, 2010). Such firms have the option to follow the technologies they already have and continue using established routines for present performance (Arend, Patel, & Park, 2013). However, in a fast changing environment, the slightest delay in seeking out emerging technologies can negatively affect market return in the long run, displeasing stakeholders (Basu et al., 2011; Gompers & Lerner, 2001; Maula et al., 2003). Of greater concern is that some of these technologies may end up being disruptive, delivering abnormal returns on the one hand, or rendering existing technologies obsolete on the other. Executives cannot forego potential opportunities by

http://dx.doi.org/10.1016/j.jbusres.2015.09.012 0148-2963/© 2015 Elsevier Inc. All rights reserved.

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

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A. Sahaym et al. / Journal of Business Research xxx (2015) xxx–xxx

simply ignoring these promising technologies—they are often motivated by the stakeholders and environment to engage in search and strategic renewal of technologies, ecosystem development, or diversification to revitalize firms' operations to create value for shareholders (Agarwal & Helfat, 2009; Narayanan et al., 2009; NVCA (National Venture Capital Association), 2008). Indeed, CVC investments provide a valuable window on emerging technologies and competencies that can add to future growth and help in diversification or renewal (Chesbrough & Rosenbloom, 2002; Dushnitsky & Lenox, 2006; Gompers & Lerner, 2001; Ivanov & Xie, 2010; Walters et al., 2010). While prior research offers valuable insights into how established firms' top management team members influence investment-related strategic decisions (Boeker, 1997; Finkelstein & Hambrick, 1990), research has yet to focus on the drivers of the strategic decisions of recently IPO'd firms. Given that post-IPO firms have recently gone through major governance-related and structural changes, it is plausible that antecedents and drivers of decisions, such as CVC investment, may differ from those of established firms. Behavioral agency perspective, therefore, becomes salient in this setting because TMT members face the dilemma of whether to take the calculated risk of investing in the future or foregoing the opportunity to the possible detriment of the long-term interests of the principal (Makri et al., 2006). Extant research has yet to address this dilemma or to apply the behavioral agency perspective to the discussion. Indeed, a number of scholars have called for a deeper examination of the drivers of CVC using diverse theoretical lenses and varied contexts, suggesting the role of TMT, board, and ownership structure in motivating the use of such investments (Covin & Miles, 2007; Dalton & Dalton, 2011; Phan et al., 2009; Schildt, Maula, & Keil, 2005). In response to these calls, we employ insights from both the behavioral agency view and upper-echelon theory to examine the conditions under which TMT heterogeneity may motivate the use of CVC. We specifically focus on the roles of CEO and chairperson of the board of directors (henceforth referred to as chair) non-duality, and the proportion of direct stock ownership by members of the TMT in influencing this relationship. On the one hand, heterogeneity, ownership, and nonduality lie at the core of organizational structure and are fundamental to corporate governance; on the other hand, their strategic role and potential impact often posit them as double-edged swords (Carpenter & Fredrickson, 2001; Finkelstein & D'Aveni, 1994; Walters et al., 2010). Indeed, the literature has yet to come to a consensus on the effects of heterogeneity on CVC, particularly when heterogeneity is combined with structural contingencies such as non-duality and ownership. We develop our arguments around the following overarching theme: in the context of post-IPO firms, TMT functional heterogeneity motivates the use of CVC, particularly in the presence of non-duality and in the higher level of TMT direct stock ownership. We chose the context of recently IPO'd firms to investigate these issues because scholars suggest that such firms are “still guided by the entrepreneurial team that was in place from the beginning and possesses the vision that has carried it through an initial public offering (IPO)” (Kroll et al., 2007: 1198). Furthermore, the boards of such firms are more concerned with rapid growth and expansion, and may use CVC for this purpose (Basu et al., 2011; Filatotchev & Bishop, 2002; Finkelstein & Hambrick, 1996; Hillman, Cannella, & Paetzold, 2000; Liu, Li, Hesterly, & Cannella, 2012). The behavioral agency perspective is particularly appropriate in our context because it underscores how failure to explore new competencies compromises future returns (Makri et al., 2006). That is, ‘inefficient risk sharing’ leads to missed opportunities and lower performance, which works against the interests of the principal (Eisenmann, 2002; Makri et al., 2006). We tested these hypotheses on a sample of 172 firms from high technology industries. By investigating the role of behavioral and structural influences in motivating CVC, we also respond to those scholars calling for an examination of the role of heterogeneity and governance

structure in strategic decision making, both in spheres of strategy and entrepreneurship (Dalton & Dalton, 2011; Dess et al., 2003; Hambrick, 2007; Kor, 2006; Phan et al., 2009). 2. Theory and hypotheses development 2.1. Corporate venture capital, behavioral agency perspective, and TMT heterogeneity 2.1.1. CVC by recently IPO'd firms CVC is an interfirm relationship developed when an incumbent acquires a minority equity stake in a new venture for the purpose of quick access to resources such as technologies and competencies (Basu et al., 2011; Covin & Miles, 2007; Keil, 2004). This inherently exploratory mode provides valuable information on emerging technologies and competencies with the potential to fill gaps in these areas (Covin & Miles, 2007; Phan et al., 2009). CVC relationships also provide formal access to resources needed to develop innovations by recombining knowledge elements (Wadhwa & Kotha, 2006). However, CVC is fraught with risks, as it involves forming relationships with new ventures outside firm boundaries, irreversible investments, and prior commitment of organizational resources in pursuit of long-term returns (Hoang & Rothaermel, 2010; Tian & Wang, 2013). For shareholders, such investments are problematic; it is difficult to control or predict outcomes due to asymmetry of information and knowledge (Roth & O'Donnell, 1996; Sanders & Carpenter, 1998). In addition, recently IPO'd firms are “at a particularly vulnerable point in their development [as] their top management teams must transition from managing privately held firms to managing publicly held firms…[they are] a complex undertaking requiring considerable creativity” (Kroll et al., 2007: 1199). Executives must manage the expectations of a number of new stakeholders as they try to invest IPO proceeds effectively for future growth. They do not yet have an abundance of strategic options relative to incumbents. Further, nascent ventures and technologies that could be potential targets for investment, often add to uncertainty as they are generally short of market legitimacy. Such ventures and technologies have limited or no history of operation and profitability. Despite these issues, new ventures and emerging technologies offer novel recombinations that present opportunities for supernormal returns through potentially dominant technologies and future market share. Given the above uncertainties and complexity, CVC investments present a high risk/high reward proposition for the management of recently IPO'd firms and executives who must exercise high levels of discretion in employing CVC (Jain & Kini, 1994, 2008; Kroll et al., 2007). 2.1.2. Behavioral agency perspective and CVC investment The behavioral agency model, or BAM (Martin et al., 2013; Wiseman & Gomez-Mejia, 1998), argues that decision makers make risky choices in response to perceived mixed gambles that involve weighing the potential for greater future returns versus protecting current returns and potential total loss in the long term. This model is particularly applicable in our context (i.e., managerial decisions related to CVC investments by post-IPO firms) for several reasons. First, while key self-interested executives of recently IPO'd firms would like to protect themselves by minimizing risk, avoiding risks associated with the strategic use of CVC could limit access to significant future technologies and negatively influence growth prospects (Anderson & Tushman, 1990; Basu et al., 2011; Eisenmann, 2002; Makri et al., 2006). Consequently, the TMTs of recently IPO'd firms in high velocity environments engage in CVC, despite high risk, because of its potential to deliver above-average or abnormal returns in the long run (Walters, Le, & Kroll, 2015; Walters et al., 2010). Second, Grenadier and Weiss (1997) argue that high technology firms actually reduce business risk by allocating resources to innovationrelated activities that allow them to compete more effectively. This is

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

A. Sahaym et al. / Journal of Business Research xxx (2015) xxx–xxx

similar to a mixed gamble where risk is inherent but the greater loss over time comes from not investing. As such, post-IPO firms' strategic use of CVC develops the most efficient contract between managers and shareholders by providing long-term alignment of interests and risk reduction for the parties (Basu et al., 2011; Dushnitsky & Lenox, 2005, 2006; Gompers & Lerner, 2001). In other words, failure to use CVC strategically goes against the self-interest of agents as it would jeopardize a firm's future success, which enhances the manager's employment and compensation risks. Further, executives are often prompted to use CVC by influential stockholders and outside board members who understand that CVC investments entail some risk but have the potential to deliver supernormal returns (Basu et al., 2011; Dushnitsky & Lenox, 2005). Third, behavioral agency perspective is particularly applicable2 in the post-IPO setting because TMT members have recently gone through major structural changes and have changing incentive structures through private to public transition. The TMT are now accountable to new stakeholders who scrutinize them for growth initiatives and efforts to meet pre-IPO commitments. As such, the TMT are motivated to engage in CVC investment to maintain growth and achieve the associated long-term gains from such investments.

2.1.3. Post-IPO firms, heterogeneity, and CVC investment Top management team heterogeneity represents diverse cognitive bases, a spectrum of values, and multiple perspectives to enhance strategic decision-making and the search for new information (Certo, Lester, Dalton, & Dalton, 2006; Finkelstein & Hambrick, 1990; Hambrick & Mason, 1984). Boone and Hendriks (2009) suggest that heterogeneous TMTs can be considered resources in the form of “nonoverlapping knowledge and multiple perspectives… (that) increase the ability of TMTs to solve complex problems, boosting decision quality. (p. 167).” Certo et al. (2006) note that the background, experience, and composition of TMT membership play important roles in their strategic choices. CVC requires an inherently risky long-term commitment to search beyond firm boundaries. Given that the post-IPO firm's environment is also fraught with uncertainty, we build on the logic of upper echelon and BAM to propose that executives with heterogeneous backgrounds will deploy their skillsets, networks, and knowledge bases to motivate the venture for long-term growth and potential abnormal returns via CVC (Dobrev & Barnett, 2005; Dushnitsky & Lenox, 2005, 2006; Wasserman, 2006). We propose that functionally heterogeneous TMTs will be more open to using CVC because functional heterogeneity brings in a range of expertise, capabilities, openness to diverse ideas, and a broader network. Top management team members with this expertise tend to enjoy a broader knowledge base and have the capacity to implement ideas from various fields (Daily, Dalton, & Cannella, 2003). Because heterogeneity enhances the comprehensiveness and range of strategic choices, heterogeneous TMTs are better able to generate creative solutions to complex issues such as investing in new projects despite the pressures of the post-IPO stage. They can discuss potentially viable projects from different lenses, reduce groupthink, and enhance overall quality of decisions (Bunderson & Sutcliffe, 2002; Carpenter, Geletkanycz, & Sanders, 2004; Doz & Kosonen, 2007, 2008; Miller, Burke, & Glick, 1998). Heterogeneity in TMT members' occupations is associated with strategic change as they tend to avoid overcommitment to the status quo and are more open to using relatively new modes of growth such as CVC (e.g., Certo et al., 2006; Geletkanycz & Black, 2001; Golden & Zajac, 2001). Further, executives in such TMTs are from non-redundant, diverse functional backgrounds having social and professional networks in a variety of industries. They can leverage the breadth of their networks and identify potential options for innovation and growth (Crossland, 2

We thank an anonymous reviewer for guiding us in this direction.

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Zyung, Hiller, & Hambrick, 2014). Such information and knowledge spillover can motivate the TMT to use CVC for promising initiatives that would be worth the risk. Upper echelon and behavioral agency views suggest that heterogeneous TMTs with access to diverse knowledge and networks will be relatively more open to calculated or reasoned risk associated with CVC; this is because of the CVC's potential for greater than normal future returns as compared to the certain future loss from inaction (Martin et al., 2013; Wiseman & Gomez-Mejia, 1998). However, consistent with prior studies that found mixed support for the influence of heterogeneity on initiatives associated with innovation, we also believe that the value of heterogeneity diminishes beyond a certain point for the following reasons. First, excessive heterogeneity may generate irreconcilable views and provoke interpersonal conflict among team members. Interpersonal conflicts are dysfunctional and they impede group cohesiveness and effective decision-making (Amason, 1996; Certo et al., 2006; Knight et al., 1999). Irreconcilable views may lead to communication breakdown among team members, which is particularly detrimental for decisions regarding short-term risk for long-term benefits such as CVC. Indeed, Knight et al. (1999) found that interpersonal conflict is often rampant among highly heterogeneous TMTs. Second, as heterogeneity increases, fault lines develop among the members and subgroups may form (Tuggle, Schnatterly, & Johnson, 2010). As a group splinters into subgroups, emotional and task conflicts, and behavioral disintegrations increase over time (Certo et al., 2006; Lau & Murnighan, 1998: 328; Li & Hambrick, 2005; Tuggle et al., 2010). Each of these characteristics, together or individually, can potentially inhibit constructive decision-making. Such decisionmaking along with vision and long-term commitment are needed in considering CVC with its inherent risk and technological uncertainty. We build on prior research that suggests that the relationship between heterogeneity and organizational outcomes is often negative or curvilinear, particularly in environments fraught with uncertainty (Carpenter & Fredrickson, 2001; Greening & Johnson, 1997). We propose that heterogeneity is beneficial up to a certain threshold, and expect to observe an inverted U-shaped effect. However, only moderate levels of heterogeneity are beneficial for pursuing CVC investments; beyond an optimum range, positive outcomes diminish and eventually become negative. To summarize, our base hypothesis is: Hypothesis 1. The relationship between TMT functional heterogeneity and post-IPO firm's use of CVC is an inverted U-shaped.

2.2. TMT heterogeneity, non-duality, and the use of CVC The presence of non-duality further contributes to the strategic use of CVC by a heterogeneous TMT. The behavioral agency view suggests that separating the CEO and chair positions in high technology firms allows at least one of the two to recognize that change is sine-qua-non in dynamic sectors and that forgoing CVC investment potentially jeopardizes their long-term compensation and employment, this despite the inherent risk in using CVC for strategic objectives. Non-duality motivates greater interaction with outside board members, which in turn opens more avenues for “connecting the dots,” gathering information from diverse sources, and searching for opportunities in the market (Dalton & Dalton, 2011; Finkelstein & D'Aveni, 1994). The presence of non-duality would ensure that the capabilities of both the heterogeneous TMT as well as board members are effectively utilized. Together, members of the TMT and the board can leverage their knowledge, skills, and social networks to support growth via CVC, which in turn serves the long-term interests of the agents. Non-duality also provides greater discretion and a broader mandate for action to the heterogeneous TMT, while guarding against risk aversion and opportunism. Further, it ensures checks and balances reducing odds of entrenchment and risk aversion prevailing over growth

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

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objectives—these motivate TMT for pursuing CVC investments rather than maintaining status quo. Indeed, scholars have found that nonduality is positively associated with the choice of bolder boundary expansion strategies (Datta, Musteen, & Herrmann, 2009), whereas duality is associated with relatively low-risk approaches (Ellstrand, Tihanyi, & Johnson, 2002). Overall, the presence of non-duality amplifies the benefits of functional heterogeneity, which include openness to ideas, market knowledge, and networks. With the guidance from board members and access to their networks, opportunity recognition and the capacity to pursue relatively ambiguous, complex, and multifunctional initiatives like the use of CVC become more accessible for a heterogeneous TMT. On the other hand, non-duality can also add to potentially dysfunctional characteristics associated with heterogeneous TMTs. Non-duality could preclude the benefits of unity of command that indicate an unambiguous leadership and decision-making authority (Finkelstein & D'Aveni, 1994). Heterogeneous TMT is known for diverse views; nonduality could further diffuse managerial discretion and power and inhibit consensus on bold strategic decisions such as the use of CVC (Carpenter & Fredrickson, 2001; Walters et al., 2010). Further, information overload and separate directions derived from non-dual leaders representing executives with diverse backgrounds could lead to slower decision making which is not conducive for CVC related activities in the fast-changing high technology sector. The presence of non-duality could particularly dampen decisionmaking by a heterogeneous TMT if there are interpersonal conflicts and ego clashes between the CEO and the chair. The strategic use of CVC is a relatively complex decision with high risk and long-term commitment, potentially leading to communication and coordination breakdowns, lack of accountability, procrastination, and ambiguous decision-making (Ancona & Caldwell, 1992; Greening & Johnson, 1997; O'Reilly, Snyder, & Boothe, 1993; Smith et al., 1994). Overall, excessive levels of power distribution via non-dual structure would further evince the dark side of heterogeneity and will be detrimental for bolder strategic decisions like the use of CVC (Carpenter & Fredrickson, 2001; Walters et al., 2010). As such, a relatively moderate level of heterogeneity is more conducive to the use of CVC, particularly when non-duality sharpens both edges of the double-edged sword that is heterogeneity: Hypothesis 2. CEO non-duality moderates the relationship between TMT's functional heterogeneity and the use of CVC such that the inverted-U relationship between TMT functional heterogeneity and use of CVC is strengthened in the presence of CEO non-duality.

2.3. TMT heterogeneity, direct ownership, and the use of CVC Through the lens of behavioral agency, CVC is a mixed blessing for high technology executives. On the one hand, the firm inherits risks associated with exploring new technologies; and on the other, it holds the potential for sustainable growth that safeguards against future employment and compensation risks. While managers and stakeholders understand that maintaining the status quo is arguably riskier in high technology domains because of the threat of obsolescence (Hillman et al., 2000; Haynes & Hillman, 2010; Leonard-Barton, 1992), executives need authority and managerial discretion to make bold decisions such as committing to use CVC for meeting strategic objectives in the long run. Managers gain such authority and discretion when they have direct stock ownership with a stake in the firm's future. Direct stock ownership by management is an effective mechanism to align management interests with those of the shareholders and motivate managers to strive for future growth (Murphy, 1999; Pollock, Fischer, & Wade, 2002; Tosi et al., 1999). Direct ownership also influences managers' ability to exert proactive control over strategic decisions such as the use of CVC (Flamholtz, 1990; Kroll et al., 2007).

Executives who gain direct stock ownership after IPO become more actively involved in growth-oriented decisions for the sake of maximizing their gains. Direct ownership mitigates against managerial self-interest seeking and opportunism at the cost of principals making stakeholders relatively more confident about managerial interests in firm growth (Martin et al., 2013; Zahra, Neubaum, & Huse, 2000). If top managers own stock, they may be less inclined to sit idle in the face of promising opportunities, but prefer to enhance the value of their stock, which in turn maximizes shareholder value (Armstrong, Larcker, Ormazabal, & Taylor, 2013; Eisenmann, 2002; Makri et al., 2006; Martin et al., 2013). In the high technology sector, where the rate of obsolescence is high and emerging technologies are key to firm survival, direct ownership could motivate a TMT to pursue CVC through a calculated evaluation of their options and investing in emerging technologies for future growth. Managers can use their discretion to take risks associated with CVC to the extent that such risks are matched by a potential increase in return on investment; such risks would facilitate long-term employment and higher compensation for themselves. Prior research shows that stock ownership by members of the TMT aligns with the long-term interests of agents and principals in postIPO firms (Armstrong et al., 2013; Kroll et al., 2007). It offers contractual rewards to management for an increase in shareholder wealth, as well as burdening TMT with the same risks as shareholders (Jensen & Meckling, 1976; Murphy, 1999; Tosi et al., 1999). In the case of recently IPO'd firms seeking partnerships with new ventures via CVC, TMT stock ownership serves several purposes. Direct ownership motivates managers to use CVC to seek potentially dominant technologies (Anderson & Tushman, 1990; Armstrong et al., 2013). Because managers are expected to work on their own behalf as they pursue CVC, direct ownership may also ease the need for direct board monitoring. In addition, direct ownership motivates managers for strategic renewal of competencies via CVC well before they become obsolete (Agarwal & Helfat, 2009). Finally, managers with direct ownership remain alert to new technology signals from the market and are motivated to take calculated risks, lest stagnant growth threatens future employment and compensation (Martin et al., 2013). In sum, TMT ownership helps a firm's heterogeneous TMT to fully leverage its capabilities by more closely aligning TMT-member interests with those of its shareholders. Indeed, functional heterogeneity represents multiple sets of expertise, perspectives, market knowledge, and networks, fostering openness to new ideas, opportunity recognition, and pursuit of complex initiatives such as CVC. Direct ownership adds to these because executives themselves have a direct stake in the growth of the firm, safeguarding them from risks to employment and compensation. Moreover, in this environment, TMT members act with due diligence and proactively use available resources and capabilities because managerial gains are tied to firm growth. In the eyes of stakeholders, ownership mitigates opportunism and reduces the odds that managers will value entrenchment and stability over long-term growth. Direct ownership provides more control, power, and managerial discretion to heterogeneous TMTs resulting in a broader mandate for pursuing promising technologies with an eye to future growth via exploratory modes such as CVC. On the other hand, direct ownership may concentrate power within the firm and amplify unfavorable attributes associated with heterogeneous TMTs when making bold decisions such as whether to use CVC. Direct ownership may create fault lines among diverse TMT members, splitting the group into subgroups based each member's stake in the firm (Tuggle et al., 2010) and resulting in conflicts, disintegration, and communication breakdowns. Direct ownership could also conceivable contribute to hubris and inhibit stakeholders from leveraging the benefits of others' resources and capabilities. We argue that excess concentration of power in the hands of insiders may cause lack of accountability, procrastination, protracted decision making, and ambiguity among heterogeneous TMT members (Carpenter & Fredrickson, 2001;

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

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Greening & Johnson, 1997; O'Reilly et al., 1993; Smith et al., 1994). As such, excessive concentration of power via ownership and heterogeneity could lead to confusion and conflicts, ego clashes at the top, and communication and coordination breakdowns—these would have negative consequences for relatively risky exploratory initiatives such as the use of CVC. So far, we have argued that heterogeneity levels have an inverted U-shaped relationship to the use of CVC, with moderate levels of heterogeneity being most conducive to the use of CVC. We have also argued that the levels of direct ownership by TMT can amplify both the positive and the negative attributes of heterogeneity. Combining these arguments, we expect that both the positive effect of heterogeneity on the use of CVC at lower levels of heterogeneity and the negative effect of heterogeneity on the use of CVC at higher levels of heterogeneity will be more pronounced when the levels of TMT members' direct ownership is high. We posit that moderate levels of heterogeneity and concentration of power inside the firm may be most conducive to growth-oriented decisions. Beyond an optimum range, such positive outcomes will diminish and eventually become negative. The detrimental effects of excessive heterogeneity and insider power manifest as a pronounced inverted U-shaped relationship beyond a point. Hypothesis 3. TMT direct ownership moderates the relationship between TMT functional heterogeneity and the use of CVC such that the inverted-U relationship between TMT functional heterogeneity and the use of CVC is strengthened in the higher level of TMT direct ownership.

3. Methods 3.1. Data and sample

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the four years after IPO. We searched the population of all private equity deals and investments by specific focal firms and their funds for the four-year period after IPO. We used name matching to identify such firms in the VentureXpert3 database. For example, Intel has a CVC capital division called Intel Capital. We included all CVC investment by ‘Intel’ and by ‘Intel Capital’ across all industry segments. For these firms, we collected data on the unique number of portfolio firms. If the focal firm is found to have no investment in any portfolio firms during the four years after IPO, we assign a zero to the focal firm (e.g., Dushnitsky & Lenox, 2005; Sahaym et al., 2010). 3.2.2. Independent variables TMT functional heterogeneity. TMT functional heterogeneity was measured using Blau's (1977) heterogeneity index: (1 − ∑ i^2), where i is the proportion of TMT members in each category (Bantel & Jackson, 1989; Carpenter et al., 2004; Certo et al., 2006; Finkelstein & Hambrick, 1990; Pegels, Song, & Yang, 2000; Pitcher & Smith, 2001; Smith et al., 1994; Zimmerman, 2008). To measure functional background, the members of the TMT were placed in one of ten categories: (1) Management, (2) Finance, (3) Marketing, (4) Engineering, (5) Law, (6) Science, (7) MIS, (8) Real Estate, (9) Mix, and (10) Other (Bunderson & Sutcliffe, 2002; Wiersema & Bantel, 1992; Zimmerman, 2008). It is expected that the TMT is more heterogeneous as this value increases. Non-duality. Non-duality was coded as a dummy variable that takes the value of 1 if a CEO is not a chairman of the board, and 0 otherwise. TMT ownership. TMT ownership was calculated by taking the number of shares held by TMT members after IPO divided by the number of shares outstanding in post-IPO firms (George, Wiklund, & Zahra, 2005).

To test our hypotheses, we collected data on all high technology firms that went public between 2001 and 2005. The initial sample consisted of 175 IPO firms. Consistent with prior research (e.g., Carpenter & Petersen, 2002; Loughran & Ritter, 2002; Vaaler & McNamara, 2010), our sample includes firms with the following SIC codes designated as high technology: SIC 28 (chemicals and allied products), 35 (industrial machinery and computer equipment), 36 (electronics and other electric equipment), 38 (instruments and related products), 48 (communications), and 73 (Business services-software). Firms in the high technology industries were considered because they generally pursue boundary expansion activities through CVC to gain access to new technologies (Basu et al., 2011; Sahaym et al., 2010). Top management team data were hand collected from prospectuses (i.e., the 424b form) found on the SEC's electronic data gathering and retrieval system. The IPO prospectus discloses information about investors, underwriters, executives, financial statements, securities, and a description of the company's businesses. Following earlier researchers (Lester, Certo, Dalton, Dalton, & Cannella, 2006; Zimmerman, 2008), TMT was defined as all executives listed in the firm's IPO prospectus, including chief executive officer (CEO), chief financial officers, chief technology officers, vice presidents, and other key managers. Lastly, CVC activities were gathered from the VentureXpert database, and other financial data were retrieved from both COMPUSTAT and the prospectuses. After dropping sample firms that have missing variables, our final sample consists of 172 IPO firms in 33, 4-digit SIC industries.

3.2.3. Control variables We included several control variables. Following norms from the IPO and strategy fields, we controlled for both firm size and firm age; these were measured, respectively, as the natural log of total employees and the difference between the foundation and IPO years. These are included to control the difference in CVC that can be attributed to firm scope and scale. We also controlled for extra resources and profitability because firms tend to make greater use of CVC activities when extra resources are available (Anokhin, 2006). A firm's financial profitability was measured as return on assets (ROA) at the time of IPO. Slack was controlled using current asset to current liabilities at the time of IPO (Chesbrough & Tucci, 2004). We controlled for net proceeds, which could be a main source for CVC. This was measured as the total amount raised by the issuers, excluding fees and expenses. TMT tenure was included as the average number of years a member of the TMT worked at the focal company. Top managers with longer tenure are significantly more committed to the status quo and less to strategic change (Hambrick, Geletkanycz, & Frederickson, 1993; Srivastava & Lee, 2005). This may hinder IPO firms from using CVC. Because firms with more outsiders on the board of directors could be more open to strategic changes, outsider ratio was controlled for by dividing the number of outside board members by the size of the board. A CEO founder variable was used to control for CEO founder influence on

3.2. Measures

3 We include the following VentureXpert categories: Non-Financial Corp Affiliate or Subsidiary Partnership, Venture/PE Subsidiary of Non-Financial Corp., Venture/PE Subsidiary of Other Companies NEC, Venture/PE Subsidiary of Service Providers, Direct Investor/ Non-Financial Corp, Direct Investor/Service Provider, SBIC Affiliate with non-financial Corp. and Non-Financial Corp. Affiliate or Subsidiary. We excluded investments by corporate pension funds because these investments are distinct and unlikely to result in learning benefits.

3.2.1. Dependent variable The variable CVC reflects the number of corporate venture capital deals made by post-IPO firms in the sample. We measured CVC as the unique number of portfolio firms invested in by each focal firm during

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

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A. Sahaym et al. / Journal of Business Research xxx (2015) xxx–xxx

CVC; this was coded 1 if a founder is the CEO of a company, and 0 otherwise. CEO founders are more likely to pursue investment activities (Fahlenbrach, 2009). Venture capital backing (VC Directors) was coded as a dummy variable, which is 1 if a company is venture backed, and 0 otherwise (Brau, Sutton, & Hatch, 2010). This variable was controlled for by dividing the number of venture capitalist directors by board size. Venture capitalists tend to sit on the board of directors and provide valuable advice and access to capital, which could influence the firm's decision to engage in CVC as well as influence subsequent performance of VC backed IPO firms (Brav & Gompers, 1997; Gompers & Lerner, 2001). Expansion activities was a dummy variable that was coded 1 if a company engaged in one of three boundary activities (acquisitions, alliances and joint ventures) which allowed us to control for other modes of boundary expansion. Finally, industry and year effects were controlled for by including dummy variables based on two-digit SIC codes and IPO year. 3.2.4. Model specification and estimation Because our dependent variable, CVC, is a count variable reflecting the unique number of portfolio firms, the ordinary least squares model is not appropriate. Additionally, the variable has a mean of 6.14 and a standard deviation of 26.14. When such overdispersion exists, the standard errors of estimators from the Poisson model could be biased (Cameron & Trivedi, 2009). The estimate of the log-transformed overdispersion parameter alpha indicates that Negative Binomial (NB) regression is more appropriate for our data. The Hausman test also shows a significant difference in coefficients between the Negative Binomial model and the Poisson model. Therefore, we conducted an NB regression analysis with a robust option that considers overdispersion and adjusts standard errors for heterogeneity (Cameron & Trivedi, 2009). The hierarchical NB regression analysis for estimation is a relatively conservative method for examining interaction effects due to the fact that interaction terms are tested for significance after all lower-order effects, including key independent variables, have been entered into the regression equation (Jaccard, Wan, & Turrisi, 1990). Moderation effects are supported only if the model containing the interaction terms represents a statistically significant improvement over the model containing the direct effects (Baron & Kenny, 1986; Rothaermel & Alexandre, 2009). 4. Results Table 1 summarizes dependent variable and key independent variable statistics for subsamples of post-IPO firms with and without CVC. In our 172 sample firms, 23 post-IPO firms engaged in CVC, about 13% of our sample. This is consistent with prior research (Basu et al., 2011; Dushnitsky & Lenox, 2005, 2006; Sahaym et al., 2010). An analysis of the dependent variable, unique number of portfolio firms, found 23 post-IPO firms on average engaged in 45 unique portfolio firms within 4 years after IPO. Top management team heterogeneity of the 23 firms that engaged in CVC activity is 0.61, whereas TMT heterogeneity is 0.66 for firms did not engage in CVC activity. Descriptive statistics and correlations of all variables are presented in Table 2. There were no high correlations in the pairs of variables. Additionally, the tolerance and variance inflation factor (VIF) were also checked using ordinary linear square (OLS) regression, a more conservative method of checking multicollinearity between independent variables. The values of VIF had a mean of 1.66 and a maximum of

3.67, further demonstrating multicollinearity is not an issue with our data (Cohen, Cohen, West, & Aiken, 2003). To avoid multicollinearity between other variable and interaction terms, we centered all continuous variables involved in the interaction terms (Aiken & West, 1991). We used hierarchical moderated NB analyses for the estimation by regressing CVC on higher order variables in subsequent models. The results of the regression models testing all hypotheses are presented in Table 3. Model 1 in Table 3 includes all control variables. Model 2 shows the influence of TMT functional heterogeneity, non-duality, and TMT ownership. Model 3 demonstrates the influence of TMT functional heterogeneity's squared term. Model 4 first shows the interaction effect between non-duality and TMT functional heterogeneity; it also shows the interaction effect of TMT ownership and TMT functional heterogeneity. Model 5 demonstrates the moderation effect of non-duality on the squared term of TMT functional heterogeneity and shows the moderation effect of TMT ownership on the squared term of TMT functional heterogeneity. Hypothesis 1 predicted an inverted U-shaped relationship between TMT functional heterogeneity and CVC. The coefficient of the squared term of TMT functional heterogeneity in Model 3 is positive but not significant. Therefore, we do not find support for Hypothesis 1. The result suggests that moderators may play an important role in the relationship between TMT functional heterogeneity and CVC. Hypothesis 2 proposes that the inverted U-shaped relationship between TMT functional heterogeneity and CVC manifests as CEO nonduality. We find that the coefficient of interaction for TMT functional heterogeneity and non-duality is positive and significant (Model 4, β = 17.56, p b 0.05); the coefficient of interaction for the squared term of TMT functional heterogeneity and non-duality is negative and significant (Model 5, β = − 109.80, p b 0.01). This suggests that the inverted U-shaped relationship between TMT functional heterogeneity and CVC manifests in the presence of non-duality. To better understand the nature of the moderating effect, we plotted the CVC by varying the level of TMT functional heterogeneity in the presence of non-duality vs. duality (Fig. 1). The varying level of the graph represents ±2 standard deviation from the mean of TMT functional heterogeneity in the presence of non-duality vs. duality. Consistent with Hypothesis 2, a clear inverted-U relationship between TMT heterogeneity and CVC was found in the presence of nonduality (note the unbroken line in Fig. 1). When non-duality is present as a moderator, the curve becomes more concave showing a combinatory effect. That is, when the CEO and chair positions are separate (nonduality) the slope is more positive with low and moderate diversity, whereas high TMT heterogeneity produces a more negative slope. This implies that, with non-duality, very low and very high levels of TMT heterogeneity are associated with lower levels of CVC activity. As such, non-duality is a key contingency that interacts with TMT functional heterogeneity and reveals the proposed inverted U-shaped relationship. A U-shaped relationship between TMT heterogeneity and CVC was also found with duality (the CEO and chair are held by one person). In other words, both very high and very low levels of heterogeneity produced excessive CVC activity (see the broken line in Fig. 1), indicating that the proposed inverted U-relationship does not exist with duality. Similarly, Hypothesis 3 proposed that the higher level of TMT ownership strengthens the inverted U-shaped relationship between TMT functional heterogeneity and CVC. The coefficient of interaction for TMT functional heterogeneity and TMT ownership is positive and significant (Model 4, β = 0.38, p b 0.01); and the coefficient of interaction for

Table 1 Summary statistics of post-IPO firm with and without CVC.

149 firms without CVC 23 firms with CVC Total 172 firms

TMT functional heterogeneity

TMT ownership

Non-duality

Unique number of portfolio Firms

0.66 0.61 0.66

13.43 14.77 13.61

0.62 0.43 0.60

0.00 45.96 6.15

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

0.66 0.15 13.61 16.33

1.00 −0.12

4.32 2.98

⁎

⁎

0.75 0.13

⁎⁎ ⁎⁎

1.00 −0.11 0.02 0.06 0.03 0.20 −0.27 0.15 ⁎⁎

1.00 −0.11 −0.03 −0.19 −0.13 −0.14 −0.04 0.06 −0.15

To check the robustness of our results, we conducted additional analyses. We used an alternative dichotomous measure of the dependent variable consisting of CVC activity (coded 1 for CVC activity, 0 for no CVC activity) and total CVC investment over the four years after IPO. We tested our model with these alternative measures and found no notable difference. We also checked time sensitivity (i.e., the influence of time lag between dependent variable and independent variable) using the unique number of portfolio firms from one to four years after IPO. The results showed very consistent results across the models.4 We also constructed three different functional heterogeneity measures (i.e., 10, 9, and 8 categories) and ran an NB regression model on each of the three. The estimates with different operationalization were similar to those reported in our main model. Finally, we used the Zero Inflated NB model to test our hypotheses. The results of the Vuong test indicate that the Zero Inflated NB model does not have a good fit (p N 0.43), suggesting that NB model is more appropriate. All these findings suggest that our results are robust across different model specifications, different operationalization of dependent variables and different TMT functional heterogeneity categorizations. We also tested the possible endogeneity of TMT heterogeneity using the Durbin-Hu-Hausman test. As instruments, we chose TMT size, TMT tenure diversity, and the number of acquisitions by the focal firm. We

−0.27 0.47 5.63 1.49 6.15 26.14

⁎⁎

⁎⁎

10.44 9.81

⁎

⁎⁎ ⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎

1.00 0.34 0.46 −0.56 0.69 0.44 0.02 −0.21 −0.14 0.05 −0.29 −0.01 −0.04 −0.05

N = 172. ⁎ p b 0.05. ⁎⁎ p b 0.01.

Mean St. dev.

CVC Firm size Firm age ROA Slack Net proceeds TMT tenure Outsider ratio Founder CEO Venture capital backing Expansion activities VC directors Non-duality TMT ownership TMT functional heterogeneity

1.

⁎⁎

2.

1.00 0.07 0.06 0.13 0.08 0.08 −0.01 0.02 0.04 −0.13 −0.03 −0.11 −0.06 0.09 0.03

⁎⁎

3.

1.00 0.23 −0.16 0.24 0.53 0.05 −0.17 −0.03 −0.02 −0.11 0.02 0.02 0.01

⁎⁎

4.

1.00 −0.26 0.38 0.33 −0.11 −0.10 −0.04 −0.02 −0.14 −0.05 0.11 −0.12

⁎⁎ ⁎⁎ ⁎⁎

6.12 5.56

1.00 −0.31 −0.18 −0.03 0.12 0.05 −0.13 0.17 0.01 0.03 −0.05

⁎

⁎⁎ ⁎⁎ ⁎

18.2 0.88

⁎

⁎

1.00 0.27 0.07 −0.18 −0.14 0.07 −0.17 0.03 −0.09 0.06

⁎⁎

0.31 0.47

⁎⁎ ⁎⁎

⁎⁎

1.00 0.07 0.02 −0.01 −0.20 0.28 −0.11 ⁎⁎

9. 8. 7. 6. 5.

0.74 0.44

1.00 0.08 0.03 −0.06 −0.08 0.13

⁎⁎

0.55 0.50

1.00 0.06 −0.02 −0.04 0.00

⁎⁎

0.14 0.12

1.00 −0.05 −0.09 −0.05

⁎⁎

0.60 0.49

1.00 −0.23 0.01

⁎⁎

14. 13. 12. 11. 10.

4.1. Robustness tests

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Table 2 Descriptive statistics and correlations among key variables.

7

the squared term of TMT functional heterogeneity and ownership is negative and significant (Model 5, β = −4.13, p b 0.01). To better understand the nature of the moderating effect, we plotted CVC by varying the level of TMT functional heterogeneity in the presence of higher versus lower TMT ownership (Fig. 2). The varying level of the graph represents ± 2 standard deviation from the mean of TMT functional heterogeneity with high TMT ownership. An inverted U-shaped relationship between TMT functional heterogeneity and CVC is found in the presence of high TMT direct ownership; the relationship becomes stronger with increasing TMT ownership levels, supporting Hypothesis 3 (Fig. 2). With greater than average TMT ownership, the relationship between heterogeneity and CVC becomes more concave and has a stronger inverted-U relationship (Fig. 2, note the unbroken line) as compared to that of average ownership. The inverted U-shaped relationship suggests that only moderate levels of heterogeneity are beneficial for pursuing CVC investments in the presence of high ownership; beyond an optimum range, the use of CVC diminishes and eventually becomes negative. Our results also show that when TMT ownership is low, there is a U-shaped relationship between TMT heterogeneity and CVC. At the lower levels of TMT ownership, too low and too high levels of heterogeneity induce TMT in post-IPO firms to engage in excessive levels of CVC activity. This suggests that weak governance structures induce excessive CVC activity and may harm a firm's CVC initiatives. To summarize, Figs. 1 and 2 show that inverted U-shaped relationship between TMT functional heterogeneity and CVC exists only in the presence of CEO non-duality, and TMT ownership. The results indicate that TMT ownership and CEO non-duality play an important role as organizational contingencies that explain the relationship between TMT heterogeneity and CVC.

⁎⁎

15.

1.00

A. Sahaym et al. / Journal of Business Research xxx (2015) xxx–xxx

4 Although the effect of change in TMT composition on CVC is not the focus of this study, we gathered additional data of all the variables for 172 firms in one year after IPO and created a two-year data set (our pool sample (N = 343)). TMT information was handcollected from the proxy statement at one year after IPO and CVC activity and other financial information was collected from VentureXpert and Compustat. Our dataset shows that TMT composition and its characteristics were not changed significantly across the two time windows. For example, CEO non-duality was identical across the two time periods. To check the robustness of our results, we ran a pooled NB regression model with firmclustered standard error. The results were consistent with the results reported in this manuscript. Because our main interest is in how TMT composition influences CVC activity in the IPO context, we used the results of pooled regression for robustness check purpose.

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

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A. Sahaym et al. / Journal of Business Research xxx (2015) xxx–xxx

Table 3 Results of the negative binominal analysis for the relationship between TMT functional heterogeneity, non-duality, TMT ownership and predicted CVC. Model −2.73 1.56 0.13 4.91 0.14 −1.90 −0.22 3.48 3.77 0.38 0.82 −6.85 Yes

Intercept Firm size Firm age ROA Slack Net proceed TMT tenure Outsider ratio Founder CEO Venture capital backing Expansion activities VC directors Industry and year dummies

1 (1.67) (0.47) (0.07) (1.19) (0.06) (0.68) (0.13) (3.53) (0.86) (0.81) (0.69) (3.77)

†

⁎⁎ ⁎ ⁎⁎ ⁎ ⁎⁎ †

⁎⁎

⁎

Non-duality TMT ownership TMT functional heterogeneity TMT functional heterogeneity squared

Model

2

Model

3

Model

4

−0.15 1.02 0.13 5.03 0.14 −0.60 −0.42 −2.61 3.91 −0.83 0.32 −15.58 Yes

(2.03) (0.54) (0.10) (1.50) (0.06) (0.77) (0.13) (6.09) (0.83) (0.86) (0.75) (5.21)

⁎⁎

−0.74 1.09 0.14 5.24 0.14 −0.79 −0.36 −4.11 4.20 −0.83 0.18 −14.04 Yes

(1.89) (0.55) (0.09) (1.48) (0.06) (0.82) (0.14) (6.44) (0.90) (0.81) (0.82) (5.84)

−1.47 1.14 0.14 3.89 0.09 −0.82 −0.41 −0.91 4.82 −1.50 −0.10 −15.58 Yes

(1.39) (0.47) (0.08) (1.54) (0.07) (0.81) (0.14) (5.20) (0.94) (0.90) (0.76) (5.18)

−2.38 −0.10 −12.37

(0.88) (0.03) (3.82)

⁎⁎ ⁎⁎ ⁎⁎

−2.20 −0.10 −8.07 17.66

(0.79) (0.03) (4.97) (19.43)

−1.83 −0.10 −16.40 9.25

(0.96) (0.04) (5.96) (14.46)

⁎ ⁎⁎ ⁎⁎

(7.79) (0.13)

⁎ ⁎⁎

⁎ †

⁎⁎ ⁎ ⁎⁎ ⁎⁎

TMT functional heterogeneity ∗ non-duality TMT functional heterogeneity ∗ TMT ownership

⁎ †

⁎⁎ ⁎ ⁎⁎ ⁎⁎

⁎⁎

⁎⁎ ⁎⁎ †

17.56 0.38

TMT functional heterogeneity squared ∗ non-duality TMT functional heterogeneity squared ∗ TMT ownership −156.5 159.3 172

Log pseudolikelihood Wald chi-square Number of obs.

−151.8 125.4 172

−151.5 142.9 172

−149.6 165.7 172

Model ⁎⁎ ⁎ ⁎⁎

⁎⁎ ⁎⁎ ⁎ ⁎⁎

5

−1.32 0.54 0.14 6.54 −0.01 −1.15 −0.42 −2.98 5.79 −3.66 −0.49 −17.80 Yes

(1.70) (0.51) (0.03) (1.75) (0.09) (0.78) (0.13) (6.29) (1.15) (1.15) (1.14) (5.17)

−0.28 −0.06 0.05 79.50

(0.90) (0.02) (7.39) (23.63)

−9.25 −0.38

(11.88) (0.24)

†

−109.80 −4.13

(31.74) (1.36)

⁎⁎ ⁎⁎

⁎⁎ ⁎⁎ †

⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎

⁎⁎ ⁎⁎

−145.9 163.7 172

Standard errors are in parentheses. † p b 0.10. ⁎ p b 0.05. ⁎⁎ p b 0.01 (all two-tailed tests).

chose them because these variables may represent TMT heterogeneity, but are not directly correlated with CVC activity. With these variables, we conducted two-stage least squares procedure to check for a potential endogeneity problem of TMT heterogeneity in our model. Specifically, we tested both a just-identified instrumental model and an overidentified model for our independent variable, TMT heterogeneity. Our analyses consistently showed that TMT heterogeneity is not an endogenous variable, suggesting that our results are less likely to be biased. These additional robustness checks provide strong support for our findings. 5. Discussion

to build on the insights of the behavioral agency perspective and integrate those with upper echelons logic to examine the influence of TMT functional heterogeneity, non-duality, and TMT ownership on the use of CVC by recently IPO'd firms. By examining this unique context, where post-IPO firms are exposed to major governance-related and structural changes, we proposed that TMT members must deal with the strategic quandary of whether to engage in CVC activity or relinquish the opportunity for future payoff. Our results show that heterogeneous TMTs are willing to take calculated risks and use CVC investments strategically in the presence of non-duality. Specifically, our results show that when CEO and chair positions are separate, moderate levels of functional heterogeneity are most conducive to CVC exploitation.

How TMT characteristics influence CVC remains an important question in strategic entrepreneurship. This is one of the first studies

+20

+10

Predicted CVC

Predicted CVC

+8

+4

0

0

-10

-4 -20 -2 S.D. -8 -2 S.D.

TMT Functional Heterogeneity Non-duality

+2 S.D.

Duality

Fig. 1. The moderating effect of non-duality on the relationship between TMT functional heterogeneity and predicted CVC.

TMT Functional Heterogeneity

+2 S.D.

TMT ownership + 2 S.D.

TMT ownership + 1 S.D.

mean TMT ownership

TMT ownership -1 S.D.

TMT ownership - 2 S.D.

Fig. 2. The moderating effect of TMT ownership on the relationship between TMT functional heterogeneity and predicted CVC.

Please cite this article as: Sahaym, A., et al., Mixed blessings: How top management team heterogeneity and governance structure influence the use of corporate venture capital by ..., Journal of Business Research (2015), http://dx.doi.org/10.1016/j.jbusres.2015.09.012

A. Sahaym et al. / Journal of Business Research xxx (2015) xxx–xxx

The presence of CEO non-duality accentuates the benefits of functionally heterogeneous TMTs up to a certain threshold, beyond which excessive levels of heterogeneity and power distribution may result in entrenchment, slower decision-making, interpersonal conflict, coordination breakdown, and ambiguous decisions. As such, beyond the point of inflection, positive outcomes diminish and the relationship becomes negative. This finding extends prior research by Carpenter and Fredrickson (2001) who noted that the relationship between heterogeneity and organizational outcomes could often be negative or curvilinear as it highlights the role of non-duality, that is, when CEO and chair positions are separate. We also found that direct stock ownership by the members of a TMT influences the relationship between functional heterogeneity and the use of CVC. In the presence of high TMT ownership, moderate levels of functional heterogeneity are most conducive for the use of CVC. The interests of stakeholders are aligned with those of the TMT by direct stock ownership. Thus, through direct ownership, the TMT is motivated to leverage its collective expertise, perspectives, market knowledge, networks, and capabilities. However, beyond the point of inflection, heterogeneity and ownership may develop fault lines leading to conflicts, disintegration, communication breakdowns, slower decision-making, and ambiguous decisions. That is, positive outcomes diminish and the relationship becomes negative. While prior CVC literature has mostly looked at established firms investing in startups (e.g., Gompers & Lerner, 2001; Masulis & Nahata, 2009), our study extends prior research by focusing on firms that experienced a critical transition through IPO to join the public sphere. Specifically, we extend the literature by highlighting the conditions that motivate the use of CVC by a recently IPO'd firm. Like mature firms that pursue strategic benefits through CVC funding, post-IPO firms in the high tech industry were also motivated to pursue CVC when the benefits of TMT functional heterogeneity are realized in the presence of non-duality and TMT ownership. Our study is by no means exhaustive and has a number of limitations. First, although we examined the population of high technology U.S. IPO firms over a five year period (2001 to 2005), the question of generalizability to firms in diverse industries remains. Future research may explore the impact of TMT characteristics on CVC activity of firms in different life-cycle stages. Although we found strong results, any attribution to causality would have to be interpreted with care. Future research may use methods such as the Granger test to ascertain causality. Second, building on Walters et al. (2010) we assume that recently IPO'd firms are still guided by entrepreneurial teams that were in place from the beginning and that they strive to keep their obligations to investors. Moreover, the use of lag structure and results from sensitivity tests provide support that our research design is appropriate for this study. However, we acknowledge that TMT characteristics, board structure, and ownership arrangements may change over time. For this reason, researchers may choose to use panel design to examine how changes in TMT characteristics and contractual arrangements influence a firm's strategic decisions over time, particularly with regard to CVC activity. This study considers the TMT to be a coherent group in terms of having direct equity ownership. It is plausible that uneven distribution of equity among insiders may generate conflicts that influence strategic decisions. Future research may explore such possibilities by going into the details of distribution for each member.

5.1. Theoretical and managerial implications and future research This study has important implications for the strategic entrepreneurship and governance literatures. We show that TMT direct ownership and CEO non-duality are two critical contingencies that combine with heterogeneity to influence CVC strategy. Future research could identify other governance-related conditions that affect the use of CVC

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and other vital strategic decisions such as alliances, acquisitions, joint ventures, and R&D allocation decisions. Our findings also have important implications for recently IPO'd firms' corporate governance. The functional heterogeneity of the TMT has been shown to be important to IPO firms because it enhances their valuation at the time of IPO (Zimmerman, 2008). Our findings further show that up to a certain point, the benefits of TMT functional heterogeneity for post-IPO firms are better materialized in the presence of CEO non-duality, and TMT ownership. Recently IPO'd firms may be able to capture the benefit of TMT functional heterogeneity by establishing an appropriate governance structure (i.e., non-duality, and TMT ownership) that increases interaction among TMT members and closely aligns the interests of TMT members with those of its shareholders. Such a governance structure fully leverages the capabilities of moderately heterogeneous TMTs and increases CVC investment. Our findings highlight the importance of well-designed governance structures in promoting CVC activity by recently IPO'd high technology firms. By demonstrating that TMT functional heterogeneity, non-duality, and TMT ownership support active use of CVC, this study adds to the CVC literature where little is known about a firm's inclination to engage in CVC activity (Dushnitsky & Lavie, 2010). It also expands our knowledge of the drivers of CVC activity (Basu et al., 2011). Further, this work moves away from the traditional emphasis on CVC by well-established industry leaders to focus on post-IPO firms. Prior literature has mostly assumed that all the firms leveraging CVC are homogeneous having similar objectives (Knyphausen-Aufseb, 2005). We believe that firms at different stages of life-cycle may have different objectives and this study shows that recently IPO'd firms distinct in that they primarily engage in CVC-enabled activates to ensure future growth in rapidly changing high-technology industries. Finally, this study contributes to upper echelons literature by showing that the curvilinear relationship between TMT functional heterogeneity and CVC activates under the certain conditions. Meta-analysis by Certo et al. (2006) showed that most TMT heterogeneity studies found a positive linear relationship between heterogeneity and strategy. To our knowledge, this is the first study to find that two moderating variables—CEO non-duality and TMT ownership—result in an inverted U-shaped relationship between functional heterogeneity and CVC deals. Future research may build on the foundation laid by this study to present a more complete picture of the relationship between the antecedents of TMT characteristics and diverse strategic outcomes. References Agarwal, R., & Helfat, C.E. (2009). Strategic renewal of organizations. Organization Science, 20(2), 281–293. Aiken, L. S., & West, S. G. (1991). Multiple regression: Testing and interpreting interactions. Newbury Park, CA: Sage. Amason, A. C. (1996). Distinguishing the effects of functional and dysfunctional conflict on strategic decision making: Resolving a paradox for top management teams. The Academy of Management Journal, 39(1), 123–148. Ancona, D. G. & Caldwell, D. F. (1992). Demography and design: Predictors of new product team performance. Organization Science, 3(3), 321–341. Anderson, P., & Tushman, M. L. (1990). Technological discontinuities and dominant designs: A cyclical model of technological change. Administrative Science Quarterly, 35(4), 604–633. Anokhin, S. (2006). Empirical essays on corporate innovation: Untangling the effects of corporate venture capital, unpublished dissertation, case western reserve university. http://www.ohiolink.edu/etd/send-pdf.cgi?case1152821357 Arend, R. J., Patel, P. C., & Park, D. H. (2013). Explaining post-IPO venture performance through a knowledge-based view typology. Strategic Management Journalhttp://dx. doi.org/10.1002/smj.2095. Armstrong, C. S., Larcker, D. F., Ormazabal, G., & Taylor, D. J. (2013). The relation between equity incentives and misreporting: The role of risk-taking incentives. Journal of Financial Economicshttp://dx.doi.org/10.1016/j.jfineco.2013.02.019 Bantel, K. A., & Jackson, S. E. (1989). Top management and innovations in banking: Does the composition of the top team make a difference? Strategic Management Journal, 10(S1), 107–124. Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. Basu, S., Phelps, C., & Kotha, S. (2011). Towards understanding who makes corporate venture capital investments and why. Journal of Business Venturing, 26(2), 153–171.

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