Monday, August 25, 2014

The New Lyrics of the Old Folks: The Role of Family Ownership in Corporate Innovation

HSU Po-Hsuan, HUANG Sterling, MASSA Massimo, ZHANG Hong
Read the working paper
INSEAD Working Paper 2014/51/FIN

According to conventional wisdom, family ownership, which signals a lack of social capital and trust in an economy, may impede innovation. This argument, however, fails to recognize that modern family firms can benefit from capitalist institutions that promote innovation. Using a comprehensive sample of U.S. family-owned public firms and patents for the period from 2000 to 2010, we show that family ownership promotes innovation and that this positive effect can be attributed to reduced financial constraints, a greater commitment to long-term value, and improved corporate governance. Causality is confirmed by an instrumental variable analysis using the state-level divorce rate and a difference-in-difference analysis based on changes in estate taxes (the Economic Growth and Tax Relief Reconciliation Act of 2001).