Employee entrepreneurship and signaling role of corporate venturing decisions

Abstract

This paper develops a signaling model to examine firms' corporate venturing decisions about projects proposed by their current employees. When the firm has better information, vis-a-vis the market, about the entrepreneurial ability of the employee, its decision to implement the worker's project serves as a signal of high ability. This provides the firm with an incentive to distort the corporate venturing decision to conceal information from the market. The model provides a rationale for why the likelihood of corporate venturing decreases with the worker's tenure at the firm. Also, the analysis shows that higher degrees of competition in the firm's core business weaken its incentive to distort project implementation, thereby leading to higher levels of corporate venturing activity.