Corporate governance, family firms, and innovation

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.