Dual-Class Shares, Corporate Innovation, and the Life Cycle of Firms: International Evidence

Abstract

Theoretically, dual-class ownership can promote innovation by increasing managerial flexibility and tolerance to failure. Yet, it can also inhibit it by promoting managerial entrenchment and misbehavior. Using hand-collected firm-level international data, we document an overall negative impact of dual-class structure and the voting premium on corporate innovation. Upon closer examination, however, we demonstrate that the relationship depends on the firms’ lifecycle – it is positive for younger and negative for older firms. The effects are mitigated by alternative governance mechanisms. We mitigate potential endogeneity by exploiting an exogenous shock due to the staggered introduction of corporate board reforms across countries.

Keywords: dual-class ownership structure, innovation, patents, corporate governance, ownership, shareholders, private benefits of control, voting premium

JEL Classification: D9, E7, G