R&D and the Incentives from Merger and Acquisition Activity

Abstract

We provide a model and empirical tests showing how an active acquisition market affects firm incentives to innovate and conduct R&D. Our model shows that small firms optimally may decide to innovate more when they can sell out to larger firms. Large firms may find it disadvantageous to engage in an "R&D race" with small firms, as they can obtain access to innovation through acquisition. Our model and evidence show that the R&D responsiveness of firms increases with demand, competition and industry merger and acquisition activity. All of these effects are stronger for smaller firms than for larger firms.

Information Disclosure and the Market for Acquiring Technology Companies

“…Technology acquisitions provide an avenue for firms to avoid the uncertain process of internal technology development and quickly gain access to technological resources developed externally (Karim & Mitchell, 2000;Phillips & Zhdanov, 2012). Such resources include scientists, patent rights or tacit knowledge embedded in organizational processes and routines (Grimpe & Hussinger, 2014;Puranam & Srikanth, 2007).…”

High Risk or Low Cost – Dichotomous Choices of R&D Strategy by Startups in Markets for Technology

“…This paper contributes to three streams of literature. The first is the aforementioned literature on R&D competition between startups and incumbents when acquisition of the former is an option (Gans and Stern 2000, Henkel et al 2015, Kleer and Wagner 2013, Phillips and Zhdanov 2012. Our research introduces a dichotomy of the startups' R&D strategies and hence of the acquisitions, thus adding clarity to the strong heterogeneity of technology-focused acquisitions.…”

“…As a result, small firms invest more in R&D. With sufficiently large differences in efficiency, large firms refrain from performing R&D and rely exclusively on acquisitions. In a similar vein, Phillips and Zhdanov (2012) build a model where firms are heterogeneous with respect to production costs, and show that large firms with low costs may refrain from doing R&D and instead acquire smaller R&D active competitors. Henkel et al (2015) model R&D competition between an incumbent and an arbitrary number of startups, assuming a startup needs to be acquired by the incumbent for its invention to be commercialized.…”

Does Index Arbitrage Distort the Market Reaction to Shocks?

“…See for exampleEdmans et al (2012),Dessaint et al (2018),Phillips and Zhdanov (2013). See also the recent discussion of this identication scheme inWardlaw (2018) andBerger (2019).…”