Acquiring Innovation under Information Frictions*

Murat Celik, Xu Tian and Wenyu Wang

The Review of Financial Studies, 2022, vol. 35, issue 10, 4474-4517

Abstract: Acquiring innovation through M&A is subject to information frictions, as assessing the value of innovative targets is a challenging task. We find an inverted U-shaped relation between firm innovation and takeover exposure; equity usage increases with target innovation; and the deal completion rate drops with innovation. We develop and estimate a model of acquiring innovation under information frictions, featuring endogenous merger, innovation, and offer composition decisions. Our estimates suggest that acquirers’ due diligence reveals only 30 of private information possessed by targets. Eliminating information frictions increases capitalized merger gains by 59, stimulates innovation, and boosts productivity, business dynamism, and social welfare.

JEL-codes: E20 G30 O40 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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