R&D and the Incentives from Merger and Acquisition Activity

Gordon M. Phillips; Alexei Zhdanov

doi:10.3386/w18346

R&D and the Incentives from Merger and Acquisition Activity

Gordon M. Phillips & Alexei Zhdanov

Working Paper 18346

DOI 10.3386/w18346

Issue Date August 2012

We provide a model and empirical tests showing how an active acquisition market affects firm incentives to innovate and conduct R&D. Our model shows that small firms optimally may decide to innovate more when they can sell out to larger firms. Large firms may find it disadvantageous to engage in an "R&D race" with small firms, as they can obtain access to innovation through acquisition. Our model and evidence show that the R&D responsiveness of firms increases with demand, competition and industry merger and acquisition activity. All of these effects are stronger for smaller firms than for larger firms.

Phillips was supported by NSF grant #0965328. We would like to thank the editor, Andrew Karolyi and two anonymous referees who substantially improved the paper, Ulf Axelson, Denis Gromb, Naveen Khanna, Erwan Morellec, Urs Peyer, Adriano Rampini, Matthew Rhodes-Kropf, Merih Sevilir, Rajdeep Singh, Tony Whited and seminar participants at Boston University, HKUST, Insead, the University of Lausanne, the University of New South Wales, Tsinghua University, the 2011 Duke/UNC corporate finance conference, the 2011 Paris Corporate Finance conference, the 2011 Western Finance Association and the 2011 UBC summer conference for helpful comments and discussion. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
MARC RIS BibTeΧ
- data appendix

R&D and the Incentives from Merger and Acquisition Activity

Published Versions

Related

Topics

Programs

Working Groups

More from NBER