The Partitioning of Ownership Rights: Essays on the Partitioning of Control in Corporate Venture Capital Partnerships

The partitioning of ownership rights is an important instrument in the governance of firm partnerships. While ownership is typically understood as the authority to make decisions within certain limits, it is not absolute. Instead, ownership can be decomposed into distinct rights that are assignable to different parties. This makes it possible for partners to selectively constrain the residual control of a partner, that is, the authority to make a decision if nothing else is specified by a contract. For instance, one partner might hold the authority to decide on resource uses, while another may have the right to make decisions concerning the distribution of surplus.
Questions regarding who assumes control and under what circumstances have received significant scholarly attention in the entrepreneurial finance and strategic management literatures. An equally important question relates to the nature of these limits themselves. This thesis consists of three quantitative empirical investigations, each dealing with discrete aspects of selective constraints on ownership in the form of approval rights. All three chapters rely on datasets on corporate venture capital relationships in the healthcare sector in the United States, constructed using multiple data sources, with contracting data obtained from the certificates of incorporation stored in the PCRI COI library.
The first chapter looks at how termination rights might moderate the negative relationship between corporate investor withdrawal and the likelihood of a new venture pursuing a successful exit, either by being acquired or pursuing an IPO. Drawing on the theory of self-enforcing contracts and property rights theory, this chapter finds a contingent effect of termination rights that afford renegotiation power to the withdrawing partner. These termination rights can support an ongoing relationship by infusing relationship-specific, increasing the likelihood of new venture successful exit. Yet, these rights grant authority for opportunistic bargaining, which may exacerbate the negative relationship between partnership withdrawal and a new ventures’ successful exit.
The third chapter examines whether partitioning ownership rights through approval rights is associated with differences in new venture innovation. In the context of innovation, I find evidence that approval rights regarding resource uses are associated with a decrease in new venture innovation quality. In contrast, approval rights regarding surplus divisions may facilitate innovation if the partner operates in related knowledge domains.
The final chapter draws on property rights and ownership competence perspectives to develop hypotheses on the antecedents of types of approval rights. The empirical evidence suggests that allocations of residual control and approval rights, which require the consent of the holder to pre-specified actions, are separate decisions. Partners may use approval rights on resource use aspects, that is the authority to make decisions on how resources are utilized, to mitigate concerns of the founding team competence in directing companies. They may also use approval rights pertaining to surplus decisions, that is, how entrepreneurial rent is distributed, to mitigate coordination costs and opportunistic ex post bargaining.
In sum, this thesis explores how partners can use approval rights to partition ownership to support a relationship and illustrate its performance consequences. Its main contribution is to identify specific contexts in which partners benefit from approval rights. The findings advance research on interfirm governance by explicating new facets of hybrid governance. Thus, this thesis contributes to the literature on interfirm governance, strategic management, and entrepreneurial finance by shedding light on an alternative mechanism by which authority can be allocated in hybrid organizational forms.