R&D and the Incentives from Merger and Acquisition Activity

Gordon Phillips, University of Maryland and NBER

2nd Dec 2011  11:30 am - Room 214/5, Economics and Business Building (H69)

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 large firms optimally may decide to purchase smaller innovative firms and conduct less R&D than small firms. The model shows that firm R&D increases with competition, demand and the probability that firms are taken over. Empirically, we document that the R&D responsiveness of firms increases with demand shocks and industry merger and acquisition activity. Both of these effects are stronger for smaller firms than for larger firms. The results also show that firm R&D increases with product-market competition and with the probability a firm is an acquisition target.