Dual-Class Firms and Innovation after NAFTA

Lei Gao () and Andrey Zagorchev ()
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Lei Gao: Ivy College of Business, Iowa State University, Ames, IA 50011-1350, USA
Andrey Zagorchev: Department of Business, Rhodes College, Memphis, TN 38112, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2020, vol. 23, issue 01, 1-33

Abstract: We examine the effect of dual-class shares on U.S. firm innovation after the exogenous shock of the 1994 North American Free Trade Agreement (NAFTA), which intensified international competition. Using difference-in-differences models, we find that dual-class structure firms become less innovative but improve operating efficiency following NAFTA. We show that dual-class firms in many manufacturing industries reduce innovation, but marginally increase capital expenditures after the agreement, and thus substitute risky innovation with safer, long-term investments. The findings indicate that firms with dual-class structures facing lower competition decrease their stock market related innovation activities. We find that dual-class firms with entrenched managers decrease innovation and improve operating efficiency following NAFTA. Based on the robust results, agency costs and managerial entrenchment could explain these changes in innovations, efficiency, and investments.

Keywords: Innovation; investment efficiency; dual-class shares; corporate governance; market competition; NAFTA (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S0219091520500071

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