In the paper, R&D and the Incentives from Merger and Acquisition Activity, forthcoming in the Review of Financial Services, my co-author (Alexei Zhdanov of the University of Lausanne and the Swiss Finance Institute) and I examine how the incentives to innovate differ between large and small firms and whether the M&A market hinders or promotes innovative activity. Previous literature has documented that R&D and innovation decreases post-acquisition and has attributed this effect to large firms stifling innovative activity. Using recent data on pre-merger R&D activity, we show that this view is flawed. Rather than large firms stifling R&D by small firms, we show theoretically and empirically how mergers can stimulate R&D activity of small firms. Thus, ex ante R&D rises and then falls naturally after acquisition as the pre-merger stimulus effect wears off.
Posts Tagged ‘Gordon Phillips’
In our paper, Private and Public Merger Waves, which was recently made publicly available on SSRN, we examine the participation of public and private firms in merger waves. We find that public firms participate more in the market for assets, especially during merger waves, than private firms. Acquisitions by public firms are more likely to lead to an increase in productivity of acquired assets, especially when the assets are acquired from other public firms. Public firms also acquire and sell assets more when they are productive and when there is increased liquidity in the financial market.
However, differences in participation are not just driven by liquidity and access to capital market. First, we find that acquisition activity differs between public and private firms because of their fundamentals differ. Larger and more productive firms select public status, and these firms also engage in more acquisitions in the long run, all other things being equal. Using initial productivity from over five and ten years prior to the transaction, we show that better firms select to become public and later participate more in acquisitions. Second, public status causes a differential in response to measured firm fundamentals or macro-economic shocks. Public firms participate more because they have the option to access public financial markets at more favorable or easier terms than otherwise identical private firms. These effects are reflected in the differences in the estimated coefficients between public and private firms.