The innovation effect of dual-class shares: New evidence from US firms

• Main Authors: CAO, Xiaping, LENG, Tiecheng, GOH, Jeremy C., MALATESTA, Paul
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Dual-class; Innovation; Patents; Citations; Corporate governance; Corporate Finance; Technology and Innovation
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6682; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7681/viewcontent/Innovation_Effect_Dual_Class_2020_av.pdf
• Institution: Singapore Management University

The proliferation of dual-class structures in the US stock market presents a controversial trend since such shares are traditionally deemed to damage governance quality. We study the relationship between 362 firms with dual-class shares and their innovativeness using patent citations from Google Patents over the 1976 through 2006 period. We find dual-class shares have significant innovation effect in high-tech sectors, hard-to-innovate industries, firms with higher external takeover threat and firms heavily dependent on external equity financing. We also document a positive causality relationship between dual-class structures and the quality of innovation. The channel for this causal relationship is the protection mechanism by which managers can take a long-term view. From a policy perspective, regulators should promote a corporate governance system that protects corporate long-term interest for shareholders.