Innovations and earnings non‐synchronicity: evidence from industry M&A activities

Shih‐Chu Chou and Yu‐Fang Chu

Accounting and Finance, 2022, vol. 62, issue 1, 337-367

Abstract: This paper investigates how earnings non‐synchronicity impacts associated with firm‐level research and development (R&D) investment vary as a function of industry‐level mergers and acquisitions (M&A) intensity. Investing in R&D enables firms to differentiate and gain competitive advantages; differentiation strategies increase idiosyncratic variation in firms’ earnings. We introduce an industry‐level contextual variable, industry‐level M&A, to capture variations in innovation novelty. We show that the positive relationship between R&D investment and earnings non‐synchronicity is increasing in the intensity of inside‐industry M&A but not outside‐industry M&A. This is consistent with our conjecture that M&A within an industry facilitate knowledge base expansion and induce more innovative R&D through complementary effects.

Date: 2022
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