Dual Class Share Structure and Innovation
66 Pages Posted: 16 Jun 2018 Last revised: 18 Jan 2019
Date Written: December 21, 2018
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: Suggested Citation