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

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.