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Dual-Class Firms and Innovation after NAFTA

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  • Lei Gao

    (Ivy College of Business, Iowa State University, Ames, IA 50011-1350, USA)

  • Andrey Zagorchev

    (Department of Business, Rhodes College, Memphis, TN 38112, USA)

Abstract

We examine the effect of dual-class shares on U.S. firm innovation after the exogenous shock of the 1994 North American Free Trade Agreement (NAFTA), which intensified international competition. Using difference-in-differences models, we find that dual-class structure firms become less innovative but improve operating efficiency following NAFTA. We show that dual-class firms in many manufacturing industries reduce innovation, but marginally increase capital expenditures after the agreement, and thus substitute risky innovation with safer, long-term investments. The findings indicate that firms with dual-class structures facing lower competition decrease their stock market related innovation activities. We find that dual-class firms with entrenched managers decrease innovation and improve operating efficiency following NAFTA. Based on the robust results, agency costs and managerial entrenchment could explain these changes in innovations, efficiency, and investments.

Suggested Citation

  • Lei Gao & Andrey Zagorchev, 2020. "Dual-Class Firms and Innovation after NAFTA," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 23(01), pages 1-33, March.
    • Handle: RePEc:wsi:rpbfmp:v:23:y:2020:i:01:n:s0219091520500071
    DOI: 10.1142/S0219091520500071
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