Abstract

http://ssrn.com/abstract=2242425
 
 

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The Incentives for Vertical Acquisitions and Integration


Laurent Frésard


University of Maryland - Robert H. Smith School of Business

Gerard Hoberg


University of Southern California - FBE Dept

Gordon M. Phillips


University of Southern California; National Bureau of Economic Research (NBER)

April 13, 2014


Abstract:     
We examine the incentives for firms to vertically integrate through acquisitions and production. We develop a new firm-specific measure of vertical integration using 10-K product text to identify the extent to which a firm's products span vertically related product markets. We find that firms in high R&D industries are less likely to vertically integrate or become targets in vertical acquisitions, and are more likely to initiate customer or supplier relationships outside of the firm. These findings are consistent with firms with unrealized innovation avoiding integration to maintain ex ante incentives to make relationship-specific investments and maintain residual rights of control as in Grossman and Hart (1986). In contrast, firms in high patenting industries with mature product markets are more likely to be vertically integrated consistent with control rights being obtained by firms to facilitate commercialization of already realized innovation and to limit potential ex post holdup.

Number of Pages in PDF File: 57

Keywords: Mergers and Acquisitions, Vertical Mergers, Vertical Integration

JEL Classification: G34

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Date posted: March 31, 2013 ; Last revised: April 14, 2014

Suggested Citation

Frésard, Laurent and Hoberg, Gerard and Phillips, Gordon M., The Incentives for Vertical Acquisitions and Integration (April 13, 2014). Available at SSRN: http://ssrn.com/abstract=2242425 or http://dx.doi.org/10.2139/ssrn.2242425

Contact Information

Laurent Frésard (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
College Park, MD 20742
United States
Gerard Hoberg
University of Southern California - FBE Dept ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
HOME PAGE: http://www-bcf.usc.edu/~hoberg/
Gordon M. Phillips
University of Southern California ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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