Acquiring Innovation Under Information Frictions

57 Pages Posted: 11 Nov 2019 Last revised: 17 Apr 2020

See all articles by Murat Alp Celik

Murat Alp Celik

University of Toronto - Department of Economics

Xu Tian

University of Toronto

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: October 25, 2019

Abstract

An active M&A market incentivizes many firms to specialize in innovation with the anticipation of being acquired in the future. Acquiring innovation, however, is subject to information frictions, because acquirers often find it challenging to assess the value and impact of innovative targets. Using data on US public firms, we document that (1) there is a robust inverted U-shaped relation between a firm’s innovation and its takeover exposure; (2) equity usage increases with target innovation, and (3) deal completion rate drops as targets become more innovative. Motivated by these findings, we develop and estimate a model of acquiring innovation under information frictions. Our estimates suggest that acquirers’ due diligence reveals only 33% of private information possessed by targets, and eliminating the remaining information frictions can increase firms’ expected gains from the M&A market by 36%. This efficiency gain is achieved through a higher probability of mergers and larger value creation in completed transactions. We also find that a more efficient M&A market encourages more firm innovation, resulting in higher firm productivity growth and business dynamism. Firm size distribution becomes more polarized and the fraction of superstar firms increases.

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 Toronto ( email )

150 St George Street
Toronto, Ontario M5S 3G7
Canada
647-606-0709 (Phone)

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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