R&D and the Incentives from Merger and Acquisition Activity
Gordon M. Phillips
University of Southern California; National Bureau of Economic Research (NBER)
University of Lausanne - Institute of Banking and Finance (IBF); Swiss Finance Institute
August 15, 2012
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 also shows 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.
Number of Pages in PDF File: 65
Keywords: mergers, innovation, R&D
JEL Classification: O31, O32, G34, D43, L13working papers series
Date posted: November 27, 2012
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