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Exploratory innovation: A new perspective on family firms' under-diversification puzzle

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  • Hsu, Po-Hsuan
  • Huang, Sterling
  • Massa, Massimo
  • Qian, Yaru
  • Zhang, Hong

Abstract

We propose a new perspective on family firms' puzzling under-diversification in product spaces: these firms first need to succeed in exploratory innovation so they may diversify into new product markets. We construct a large database of family ownership and patent records of U.S. public firms, and show that family firms produce more exploratory patents than others, a relation that is stronger among under-diversified family firms. In addition, we find that such innovation indeed helps family firms diversify business risks. A causal interpretation of our result is supported by (i) using the property division standard in state-level divorce laws as an instrumental variable and (ii) constructing a propensity score matched sample. This effect is also more pronounced among larger firms, older firms, and firms in industries with faster technology replacement. Our empirical evidence addresses family firms' under-diversification puzzle through the lens of innovation strategies.

Suggested Citation

  • Hsu, Po-Hsuan & Huang, Sterling & Massa, Massimo & Qian, Yaru & Zhang, Hong, 2025. "Exploratory innovation: A new perspective on family firms' under-diversification puzzle," Research Policy, Elsevier, vol. 54(10).
    • Handle: RePEc:eee:respol:v:54:y:2025:i:10:s0048733325001490
    DOI: 10.1016/j.respol.2025.105320
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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