Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents

45 Pages Posted: 23 Aug 2021 Last revised: 20 Mar 2022

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Jan Bena

University of British Columbia - Sauder School of Business

Isil Erel

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Daisy Wang

Ohio State University (OSU) - Department of Finance

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2021

Abstract

Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential hold- up 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.

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Suggested Citation

Bena, Jan and Erel, Isil and Wang, Daisy and Weisbach, Michael S., Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents (August 2021). NBER Working Paper No. w29174, Available at SSRN: https://ssrn.com/abstract=3909619

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Isil Erel

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Daisy Wang

Ohio State University (OSU) - Department of Finance ( email )

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Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

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Belgium

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