Screening Theory and Its Boundaries: Investigation of Screen Credibility, Necessity, and Salience in the Context of Corporate Venture Capital

Screening theory explains how decision-makers search for and use external cues to overcome information asymmetry problems under conditions of uncertainty. We introduce screen credibility, screen necessity, and screen salience to the screener as boundary conditions that determine screen efficacy. We test our ideas in the context of corporate venture capital (CVC) funding aimed at industries where firms do not yet compete. These decisions are fraught with uncertainty, so we suggest that CVC decision-makers use the industry shareholdings of a firm’s quality shareholders, who are knowledgeable about many industries, as a screen to help them decide whether to continue or terminate CVC funding in that industry. We also hypothesize that screen credibility, screen necessity, and screen salience to the screener condition the fundamental screening relationship. Analysis of CVC funding termination over a period of two decades confirms our ideas. A policy-capturing study administered to executives with CVC experience offers additional support. Our study thus extends screening theory by identifying the factors that activate a screen within the decision-making process. We also add a unique element to the empirical body of CVC research as we uncover the influence of corporate ownership on CVC decision-making.