Dual Class Share Structure and Innovation

73 Pages Posted: 16 Jun 2018 Last revised: 11 Jan 2020

See all articles by Lindsay Baran

Lindsay Baran

Kent State University

Arno Forst

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

M. Tony Via

Kent State University

Date Written: December 8, 2019

Abstract

We find a positive association between disproportionate insider control and patent output, quality, creativity, and the efficient use of R&D in innovation. Managers of firms characterized by disproportionate control also take more personal innovative risk by filing their own patents. By controlling for standard entrenchment measures, we also find that insider entrenchment due to superior voting rights is distinct from entrenchment derived from standard antitakeover measures. Disproportionate insider control fosters innovation more than other forms of entrenchment. Positive effects are confined, however, to financially constrained firms and dissipate within ten years following the IPO. Dual class firms with financial constraints prefer to issue debt and are more likely to issue debt after collateralizing their patent portfolio. Our results, which control for self-selection bias by using a sample of dual and single class firms matched on their innovativeness pre-IPO, therefore support the recent call for sunset provisions on dual class shares.

Keywords: Innovation, Dual Class, Corporate Governance, Financial Constraints

JEL Classification: G32, G34, O31, O32

Suggested Citation

Baran, Lindsay and Forst, Arno and Via, Marc, Dual Class Share Structure and Innovation (December 8, 2019). Available at SSRN: https://ssrn.com/abstract=3183517 or http://dx.doi.org/10.2139/ssrn.3183517

Lindsay Baran

Kent State University ( email )

Kent, OH 44242
United States

Arno Forst

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1 W. University Blvd.
Brownsville, TX 78520
United States
(956) 882 5783 (Phone)

Marc Via (Contact Author)

Kent State University ( email )

Kent, OH 44242
United States

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