Po-Hsuan Hsu, Sterling Huang, Massimo Massa, Yaru Qian, Hong Zhang
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. © 2025 Elsevier B.V.
College of Technology Management and Taipei School of Economics and Political Science, National Tsing Hua University, 101 Sec. 2, Kuang-Fu Rd., Hsinchu City, Taiwan; NYU Shanghai, 567 West Yangsi Road, Pudong New District, Shanghai, China; INSEAD, Singapore, 1 Ayer Rajah Avenue, Singapore, 138676, Singapore; Singapore Management University, 50 Stamford Road, Singapore, 178899, Singapore
