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R&D and the Incentives from Merger and Acquisition Activity

Gordon M. Phillips1; Alexei Zhdanov2,3

1 University of Southern California · 2 Swiss Finance Institute · 3 University of Lausanne

Review of Financial Studies 2013

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.

DOI
10.1093/rfs/hhs109
Volume
26 (1)
Pages
34-78
Language
en
Export
BibTeX
Sources
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