DP11472 When is Good News Not Good News? Opening Up the Black Box of Innovation for Family Firms
This paper examines the incentives for family firms to innovate. We argue that, due to the wealth
concentration of major shareholders, family firms are incentivized to diversify their risk through
innovation. In particular, family firms use innovation to explore new (as opposed to existing)
fields of business. Using a comprehensive sample of U.S. family-owned public firms and patents
for the period from 1998 to 2010, we confirm that family ownership is positively (negatively)
related to exploratory (exploitative) innovation. Tests based on instrumental variables regression
(divorce laws of family firms’ headquarter states or neighboring states) and regulatory shocks in
inheritance taxes further offer a causal interpretation. Market prices, however, respond
negatively to family firms’ exploratory innovation, suggesting that such innovation may benefit
major shareholders of family firms at the cost of minority shareholders. Our results suggest that
risk-mitigation incentives play an important role in affecting innovation strategies, which may
have subtle implications for investors in financial markets.
