R&D and the incentives from merger and acquisition activity

Gordon M. Phillips, Alexei Zhdanov

Research output: Contribution to journalArticlepeer-review

86 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)34-78
Number of pages45
JournalReview of Financial Studies
Volume26
Issue number1
DOIs
StatePublished - Jan 2013

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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