On news of a takeover, the sum of the stock market values of the firms involved often falls, and the value of the acquirer almost always does. Does this mean that takeovers do not raise the values of the firms involved? Not necessarily. We set up a model in which the equilibrium number of takeovers is constrained efficient. Yet upon news of a takeover, a target's price rises, the bidder's price falls, and most of the time the joint value of the target and acquirer also falls.

Firms from developed countries carry a culture of transparency in business transactions that is opposite to the culture of hiding and insider dealing in developing and transition economies. We employ Russian administrative data on reported earnings and market values of cars to measure wage misreporting for individual employees of domestic firms in Moscow. We show that closer ties to multinationals lead to improved transparency of wage reporting in private Russian companies. Employees located closest to movers from multinationals in the job quality space experience the largest gains in transparency. We find a robust correlation between wage misreporting and accounting fraud.

We explore how firms grow by adding products. We leverage detailed data from Japan’s cotton spinning industry at the turn of the last century to do so. This setting allows us to fully characterize the type of differentiation (vertical or horizontal) of new product introductions as well as whether the product is within or outside of the firm’s prior technological capabilities. We find that trying to introduce innovative products beyond the firm’s previous technologically feasible set, even if such trials fail, is a key to firm growth. Indeed, it mostly facilitates growth through the firm’s later success in horizontal product diversification. In long-term outcomes, the right tail of the firm size distribution becomes dominated by firms that first moved into technologically challenging products and then later applied their newly acquired technical competence to horizontal expansion of their product portfolios. Two mechanisms through which this knowledge transfer occurs are greater production system flexibility and higher product appeal to downstream buyers.

We explore how changes in ownership affect the productivity and profitability of producers. Using detailed data from the Japanese cotton spinning industry at the turn of the last century, we find that acquired firms' production facilities were not on average less physically productive than the plants of the acquiring firms before acquisition. They were much less profitable, however, due to higher inventory levels and lower capacity utilization—differences that reflected problems in managing the uncertainties of demand. After acquisitions, less profitable acquired plants saw drops in inventories and gains in capacity utilization that raised both their productivity and profitability levels.