[We use text-based analysis of 10-K product descriptions to examine whether firms exploit product market synergies through asset complementarities in mergers and acquisitions. Transactions are more likely between firms that use similar product market language. Transaction stock returns, ex post cash flows, and growth in product descriptions all increase for transactions with similar product market language, especially in competitive product markets. These gains are larger when targets are less similar to acquirer rivals and when targets have unique products. Our findings are consistent with firms merging and buying assets to exploit synergies to create new products that increase product differentiation.]

We exploit Medicare national coverage reimbursement approvals as a quasi-natural experiment to investigate how the financing decisions of private and publicly traded firms respond to changes in investment opportunities. We find that publicly traded companies increase their external financing and their subsequent product introductions by more than private companies in response to national coverage approvals. Private equity financing is the primary source of the increased financing for public firms. We show that the stock characteristics of publicly traded firms, such as liquidity and price informativeness, and product market competition are important factors in explaining their financing advantage.

[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 also 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.]

We examine the importance of industry to firm-level financial and real decisions. We find that in addition to standard industry fixed effects, financial structure also depends on a firm's position within its industry. In competitive industries, a firm's financial leverage depends on its natural hedge (its proximity to the median industry capital-labor ratio), the actions of other firms in the industry, and its status as entrant, incumbent, or exiting firm. Financial leverage is higher and less dispersed in concentrated industries, where strategic debt interactions are also stronger, but a firm's natural hedge is not significant. Our results show that financial structure, technology, and risk are jointly determined within industries. These findings are consistent with recent industry equilibrium models of financial structure.

We examine whether sharp debt increases through leveraged buyouts and recapitalizations interact with market structure to influence plant closing and investment decisions of recapitalizing firms and their rivals. We take into account the fact that recapitalizations and investment decisions are both endogenous and may be simultaneously influenced by the same exogenous events. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. Rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.

We investigate the role of industry specialization in horizontal cross-border mergers and acquisitions. We find that acquirers from more specialized industries in a country are more likely to buy foreign targets in countries that are less specialized in these same industries. The role of industry specialization in foreign acquisitions is more prevalent when contracting inefficiencies and exporting costs limit arm's-length relationships. The economic gains in cross-border deals are larger when specialized acquirers purchase assets in less specialized industries. These results are consistent with an internalization motive for foreign acquisitions, through which acquirers can apply localized intangibles on foreign assets.

We examine the importance of industry to firm-level financial and real decisions. We find that in addition to standard industry fixed effects, financial structure also depends on a firm's position within its industry. In competitive industries, a firm's financial leverage depends on its natural hedge (its proximity to the median industry capital--labor ratio), the actions of other firms in the industry, and its status as entrant, incumbent, or exiting firm. Financial leverage is higher and less dispersed in concentrated industries, where strategic debt interactions are also stronger, but a firm's natural hedge is not significant. Our results show that financial structure, technology, and risk are jointly determined within industries. These findings are consistent with recent industry equilibrium models of financial structure.

We use text-based analysis of 10-K product descriptions to examine whether firms exploit product market synergies through asset complementarities in mergers and acquisitions. Transactions are more likely between firms that use similar product market language. Transaction stock returns, ex post cash flows, and growth in product descriptions all increase for transactions with similar product market language, especially in competitive product markets. These gains are larger when targets are less similar to acquirer rivals and when targets have unique products. Our findings are consistent with firms merging and buying assets to exploit synergies to create new products that increase product differentiation. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

We exploit Medicare national coverage reimbursement approvals as a quasi-natural experiment to investigate how the financing decisions of private and publicly traded firms respond to changes in investment opportunities. We find that publicly traded companies increase their external financing and their subsequent product introductions by more than private companies in response to national coverage approvals. Private equity financing is the primary source of the increased financing for public firms. We show that the stock characteristics of publicly traded firms, such as liquidity and price informativeness, and product market competition are important factors in explaining their financing advantage.

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 also 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.