Relationship-Specific Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents

Fisher College of Business Working Paper No. 2023-03-027

Charles A. Dice Center Working Paper No. 2023-27

80 Pages Posted: 13 Dec 2023

See all articles by Jan Bena

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)

Date Written: December 12, 2023

Abstract

The hold-up problem can impair firms’ abilities to make relationship-specific investments through contracts. Ownership changes can mitigate this problem. To evaluate changes in the specificity of human capital investments, we perform textual analyses of patents filed by lead inventors from both acquirer and target firms before and after acquisitions. Inventors whose human capital is highly complementary with the patent portfolios of their acquisition partners are more likely to stay with the combined firm post-deal and subsequently make their investments more specific to the partner’s assets. As ownership of another firm results in increasingly specific investments to that firm’s assets, contracting issues related to relationship-specific investments is likely a motive for acquisitions.

Keywords: Textual Analysis, Patents, Investment Specificity, M&A, Mergers and Acquisitions

JEL Classification: G34, L14, L22

Suggested Citation

Bena, Jan and Erel, Isil and Wang, Daisy and Weisbach, Michael S., Relationship-Specific Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents (December 12, 2023). Fisher College of Business Working Paper No. 2023-03-027, Charles A. Dice Center Working Paper No. 2023-27, Available at SSRN: https://ssrn.com/abstract=4662726 or http://dx.doi.org/10.2139/ssrn.4662726

Jan Bena

University of British Columbia - Sauder School of Business ( email )

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Isil Erel

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

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National Bureau of Economic Research (NBER) ( email )

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Daisy Wang

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Michael S. Weisbach (Contact Author)

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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