Working Paper: NBER ID: w29174
Authors: Jan Bena; Isil Erel; Daisy Wang; Michael S. Weisbach
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.
Keywords: mergers; acquisitions; specialized investments; patents
JEL Codes: G34; L14; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mergers (G34) | relationship-specific investments (D14) |
| completed mergers (G34) | patents of inventors from target firms become more specialized to those of acquirers (O36) |
| withdrawn mergers (G34) | no increase in patent specificity (L49) |
| mergers (G34) | increase in patent similarity against counterfactual acquirers (G34) |