Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents
Charles A Dice Center Working Paper No. 2021-13
45 Pages Posted: 17 Aug 2021
Date Written: August 14, 2021
Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential holdup problems. Such contracting difficulties have long been argued to be an important reason for acquisitions. To evaluate the extent to which this motivation leads to mergers, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the mergers. We find that patents of inventors from target firms become 28.9% to 46.8% more specific to those of acquirers’ inventors following completed mergers, benchmarked against patents filed by targets and a group of counterfactual acquirers. This pattern is stronger for vertical mergers that are likely to require specialized investments. There is no change in the specificity of patents for mergers that are announced but not consummated. Overall, we provide empirical evidence that contracting issues in motivating specialized investment can be a motive for acquisitions.
Keywords: textual analysis of patents, relationship specific investments, acquisitions
JEL Classification: G34, L14 and L22
Suggested Citation: Suggested Citation