Dual‐class share structure and innovation

Lindsay Baran, Arno Forst and M. Tony Via

Journal of Financial Research, 2023, vol. 46, issue 1, 169-202

Abstract: Using a sample of dual‐class firms matched with single‐class firms possessing similar antitakeover protection, we find a positive association between disproportionate insider control and patent output, quality, creativity, research and development efficiency, and chief executive officer innovative risk taking. We also find, however, that the positive effects of disproportionate control on innovation are concentrated in financially constrained firms and firms in highly competitive industries, and that the positive effects dissipate within 10 years after the initial public offering. Most important, the positive effect of dual‐class structures for innovation is conditional on the presence of innovative insiders in the firm. These findings imply that entrenchment through concentrated control in the hands of uniquely innovative corporate insiders provides a positive environment for innovativeness beyond the entrenchment effects of alternative antitakeover measures.

Date: 2023
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