Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity
University of Chicago - Booth School of Business and NBER
August 1, 2010
AFA 2008 New Orleans Meetings Paper
This paper examines the impact of the conglomerate form on the scale and novelty of corporate R&D activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-difference estimation reveals that, relative to failed targets, firms acquired in a diversifying mergers produce both a smaller number of innovations and also less novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint-ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggests that conglomerate organizational form affects the allocation and productivity of resources.
Number of Pages in PDF File: 55
Keywords: Conglomerates, Theory of Firm, Innovation, R&D, Mergers, Incentives
JEL Classification: G34, L22, L25, L26, O31, O32working papers series
Date posted: March 19, 2007 ; Last revised: August 23, 2010
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