Review of Financial Studies Vol. 35 No. 10 2022
Acquiring Innovation under Information Frictions
Abstract
Acquiring innovation through M&A is subject to information frictions, as assessing the value of innovative targets is a challenging task. We find an inverted U-shaped relation between firm innovation and takeover exposure; equity usage increases with target innovation; and the deal completion rate drops with innovation. We develop and estimate a model of acquiring innovation under information frictions, featuring endogenous merger, innovation, and offer composition decisions. Our estimates suggest that acquirers’ due diligence reveals only 30% of private information possessed by targets. Eliminating information frictions increases capitalized merger gains by 59%, stimulates innovation, and boosts productivity, business dynamism, and social welfare.
- DOI
- 10.1093/rfs/hhac006
- Volume
- 35
- Issue
- 10
- Pages
- 4474-4517
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref