Process Innovation and the Corporate Control Market

53 Pages Posted: 21 Apr 2023 Last revised: 16 Feb 2024

See all articles by Umang Khetan

Umang Khetan

University of Iowa - Department of Finance

Amrita Nain

University of Iowa - Henry B. Tippie College of Business

Date Written: April 9, 2023

Abstract

We show that specificity of process innovation affects merger decisions. We measure the composition of a firm’s innovation portfolio by machine-reading 90 million patent claims and show that firms with a higher share of process innovation generate more firm-specific knowledge: they are more likely to cite their own past patents, employ inventors who have more within-firm patenting experience, and exploit technologies already known to them rather than explore new ones. While process innovation is value-enhancing for the stand-alone firm, its specificity reduces synergistic gains from an acquisition. We find robust evidence that process innovators are significantly less likely to be acquired. Consistent with the specificity explanation, the negative effect of process innovation on acquisition likelihood is dampened if the bidder manufactures similar products and, therefore, can apply the target’s innovative processes to its own product line. Our study provides the first large-sample evidence on the fungibility of innovation and its impact on mergers and acquisitions.

Keywords: Innovation, Mergers and acquisitions, Patents, Specificity, Cost inefficiency

JEL Classification: G30, G34, O3

Suggested Citation

Khetan, Umang and Nain, Amrita, Process Innovation and the Corporate Control Market (April 9, 2023). Available at SSRN: https://ssrn.com/abstract=4413754

Umang Khetan (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Amrita Nain

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
58
Abstract Views
364
Rank
668,557
PlumX Metrics