R&D and the Market for Acquisitions

63 Pages Posted: 31 May 2011

See all articles by Gordon M. Phillips

Gordon M. Phillips

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Alexei Zhdanov

Pennsylvania State University

Date Written: April 3, 2011

Abstract

We provide a model and empirical tests showing how an active acquisition market positively affects firm incentives to innovate and conduct R&D. Our model shows how the incentives of small firms to conduct R&D in order to innovate increase with competition, demand and the probability that they are taken over. In contrast, we show that large firms optimally may decide to purchase smaller innovative firms and conduct less R&D themselves. Empirically, we document that the R&D of small firms responds more than the R&D of larger firms to demand shocks and the probability of being an acquisition target. The results also show that firm R&D increases with product-market competition and with industry acquisition liquidity and that these effects are stronger for smaller firms.

Keywords: Acquisitions, Research and Developement, Innovation, Competition

JEL Classification: G34, L11, O31, 032

Suggested Citation

Phillips, Gordon M. and Zhdanov, Alexei, R&D and the Market for Acquisitions (April 3, 2011). Swiss Finance Institute Research Paper No. 11-22. Available at SSRN: https://ssrn.com/abstract=1856034 or http://dx.doi.org/10.2139/ssrn.1856034

Gordon M. Phillips

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexei Zhdanov (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

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