Dual Class Share Structure and Innovation

66 Pages Posted: 16 Jun 2018 Last revised: 18 Jan 2019

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 21, 2018

Abstract

We find a positive association between disproportionate insider control and patent output, quality, and creativity. Managers of firms characterized by disproportionate control also take more personal innovative risk by filing their own patents. This enhanced innovativeness mitigates the negative association of disproportionate control and firm value. Positive effects are confined, however, to financially constrained firms and dissipate within five years following the IPO. 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. In contrast to existing literature on antitakeover protection and innovation, we demonstrate that, in the context of innovation, entrenchment that stems from the existence of majority control of specific individuals is more salient than entrenchment rooted in making achieving majority control impossible.

Keywords: Innovation, Dual Class, Governance, Firm Value

JEL Classification: G32, G34, O31, O32

Suggested Citation

Baran, Lindsay and Forst, Arno and Via, Marc, Dual Class Share Structure and Innovation (December 21, 2018). 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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