Acquiring Innovation Under Information Frictions

90 Pages Posted: 11 Nov 2019 Last revised: 23 Aug 2021

See all articles by Murat Alp Celik

Murat Alp Celik

University of Toronto - Department of Economics

Xu Tian

University of Georgia - Terry College of Business - Department of Finance

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: October 25, 2019

Abstract

Acquiring innovation through M&A is subject to information frictions, as acquirers find it challenging to assess the value of innovative targets. We find an inverted U-shaped relation between firm innovation and takeover exposure; equity usage increases with target innovation; and deal completion rate drops with innovation. We develop and estimate a model of acquiring innovation under information frictions, featuring endogenous merger, innovation, and offer composition decisions. Our estimates suggest that acquirers' due diligence reveals only 30% of private information possessed by targets. Eliminating information frictions increases capitalized merger gains by 59%, stimulates innovation, and boosts productivity, business dynamism, and social welfare.

Keywords: information frictions, adverse selection, innovation, mergers and acquisitions

JEL Classification: E20, G30, O40

Suggested Citation

Celik, Murat Alp and Tian, Xu and Wang, Wenyu, Acquiring Innovation Under Information Frictions (October 25, 2019). Available at SSRN: https://ssrn.com/abstract=3475698 or http://dx.doi.org/10.2139/ssrn.3475698

Murat Alp Celik (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George St.
Toronto, ON M5S 3G7
Canada

HOME PAGE: http://muratcelik.faculty.economics.utoronto.ca/

Xu Tian

University of Georgia - Terry College of Business - Department of Finance ( email )

620 S Lumpkin St
Athens, GA 30602
United States

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

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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