When is Good News Not Good News? Opening Up the Black Box of Innovation for Family Firms

66 Pages Posted: 6 Sep 2016

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Sterling Huang

Singapore Management University - School of Accountancy

Massimo Massa

INSEAD - Finance

Hong Zhang

Tsinghua University - PBC School of Finance

Date Written: August 2016

Abstract

This paper examines the incentives for family firms to innovate. We argue that, due to the wealth concentration of major shareholders, family firms are incentivized to diversify their risk through innovation. In particular, family firms use innovation to explore new (as opposed to existing) fields of business. Using a comprehensive sample of U.S. family-owned public firms and patents for the period from 1998 to 2010, we confirm that family ownership is positively (negatively) related to exploratory (exploitative) innovation. Tests based on instrumental variables regression (divorce laws of family firms' headquarter states or neighboring states) and regulatory shocks in inheritance taxes further offer a causal interpretation. Market prices, however, respond negatively to family firms' exploratory innovation, suggesting that such innovation may benefit major shareholders of family firms at the cost of minority shareholders. Our results suggest that risk-mitigation incentives play an important role in affecting innovation strategies, which may have subtle implications for investors in financial markets.

Keywords: family firms, innovation, innovation strategies, under-diversification

JEL Classification: G32, O32

Suggested Citation

Hsu, Po-Hsuan and Huang, Sterling and Massa, Massimo and Zhang, Hong, When is Good News Not Good News? Opening Up the Black Box of Innovation for Family Firms (August 2016). CEPR Discussion Paper No. DP11472. Available at SSRN: https://ssrn.com/abstract=2834809

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Sterling Huang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
6808 7929 (Phone)

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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