Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents
Charles A Dice Center Working Paper No. 2021-13
60 Pages Posted: 17 Aug 2021 Last revised: 22 Jun 2022
Date Written: June 22, 2022
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 acquisitions, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the acquisitions. We find that patents of inventors from target firms become 22% to 33% more specific to those of acquirers’ inventors following completed acquisitions. This pattern is stronger for vertical acquisitions that are likely to require specialized investments, while there is no change in the specificity of patents for acquisitions 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, L22
Suggested Citation: Suggested Citation