Relationship-Specific 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 U and ECGI
Daisy Wang: Ohio State U

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

Abstract: The hold-up problem can impair firms' abilities to make relationship-specific investments through contracts. Ownership changes can mitigate this problem. To evaluate changes in the specificity of human capital investments, we perform textual analyses of patents filed by lead inventors from both acquirer and target firms before and after acquisitions. Inventors whose human capital is highly complementary with the patent portfolios of their acquisition partners are more likely to stay with the combined firm post-deal and subsequently make their investments more specific to the partner's assets. As ownership of another firm results in increasingly specific investments to that firm's assets, contracting issues related to relationship-specific investments is likely a motive for acquisitions.

JEL-codes: G34 L14 L22 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com, nep-ind, nep-ino, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2023-27

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