Abstract
We provide a comprehensive study of how corporate governance influences innovation at family firms. Specifically, we consider productive innovation or the impact that R&D spending has on firm revenues. First, we find that family firms do indeed generate more productive innovation than non-family firms, perhaps because they are better able to have a longer-term perspective. We then show how different corporate governance mechanisms influence this relationship. In general, board ownership and CEO ownership are associated with more productive innovation at all firms. Importantly, we find that managerial entrenchment leads to more productive innovation in general, consistent with prior research; however, contrary to prior research, we do not find this result at family firms, suggesting that it’s the ownership relationship, not managerial entrenchment, that drives innovation. We also find that independent boards are associated with greater innovation at family firms but not at non-family firms. Finally, we find that dual-class share structures are harmful for innovation at all firms. Our primary contributions are identifying how firms with different ownership structures focus on creating productive innovation and analyzing how ownership structures interact with different corporate governance mechanisms to allow the firm to make longer-term investments in innovation.
Highlights
Investing in innovation is a complex endeavor
When we focus on how different corporate governance mechanisms influence this dynamic, we see that more independent boards are associated with greater productive innovation at family firms but have no impact on non-family firms
We analyze the impact family firm ownership has on a firm‟s productive innovation and consider how different corporate governance mechanisms might moderate or accentuate that relationship
Summary
Investing in innovation is a complex endeavor. It‟s expensive, it‟s risky and the benefits – if there are any benefits – may not materialize for many years. Chan, Chen, and Hilary (2010) study stock trades by family firm CEOs and find that they earn higher profits on their trades than non-family firm CEOs, suggesting that they have an information advantage It is the combination of these differences – alignment between owners and managers, longer-term ownership, information advantages – that may directly impact a firm‟s innovation strategy and a firm‟s innovation success. We find that family firms do generate more productive innovation than non-family firms, perhaps as a result of the long-term perspective developed through the relationship between the family, management, and the board of directors Note that this is true even though we find that family firms generate fewer patents and citations than non-family firms; their focus is on the value-creating outcomes of their investments in innovation.
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