Specialized Investments and Firms' Boundaries: Evidence from Textual Analysis of Patents

Jan Bena, Isil Erel, Daisy Wang and Michael Weisbach
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Isil Erel: Ohio State University and European Corporate Governance Institute
Daisy Wang: Ohio State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential holdup problems. Such contracting difficulties have long been argued to be an important reason for acquisitions. To evaluate the extent to which this motivation leads to mergers, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the mergers. We find that patents of inventors from target firms become 28.9% to 46.8% more specific to those of acquirers’ inventors following completed mergers, benchmarked against patents filed by targets and a group of counterfactual acquirers. This pattern is stronger for vertical mergers that are likely to require specialized investments. There is no change in the specificity of patents for mergers that are announced but not consummated. Overall, we provide empirical evidence that contracting issues in motivating specialized investment can be a motive for acquisitions.

JEL-codes: G34 L14 L22 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cta, nep-ino, nep-ipr and nep-tid
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https://dx.doi.org/10.2139/ssrn.3906172

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Working Paper: Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2021-13

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