Abstract
Innovation is often key to long-term success. While some family firms innovate less when growing older, others are very successful and innovative over multiple generations. We provide a new explanation for this phenomenon by showing that psychological ownership can influence the relationship between generation in ownership and innovation output. In line with the literature, we find that over the generations, innovation output decreases, being significantly lower in the third and later generation than in the founder generation. However, if the third and later generation owner-managers have high levels of psychological ownership, innovation output is as high as in the founder and second generation. Our hypotheses are supported by data obtained from 942 German firms. Innovation in the third generation and beyond seems more feasible when not only legal ownership, but also psychological ownership, is passed down to the succeeding generation.
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