The Entrepreneurial Finance of Fintech Firms and the Effect of Investments in Fintech Startups on the Performance of Corporate Investors

Abstract

We analyze the effect of corporate investments in fintech startups on startup performance and on the future performance of investing firms. Corporate investment in fintech startups is associated with greater successful exit likelihood; more and higher quality innovation; and higher inflow of high-quality inventors. We establish causality using an IV analysis. A stacked difference-in-differences analysis shows that such investments enhance the product market performance and equity market valuation of corporate investors belonging to the financial services sector, but not those in the nonfinancial sector. We show that formation of strategic alliances between investors and fintech startups drive these performance improvements.