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Firm boundaries matter: Evidence from conglomerates and R&D activity

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  • Seru, Amit

Abstract

This paper examines the impact of the conglomerate form on the scale and novelty of corporate Research and Development (R&D) activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-differences estimation reveals that, relative to failed targets, firms acquired in diversifying mergers produce both a smaller number of innovations and also less-novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggest that conglomerate organizational form affects the allocation and productivity of resources.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 111 (2014)
Issue (Month): 2 ()
Pages: 381-405

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Handle: RePEc:eee:jfinec:v:111:y:2014:i:2:p:381-405

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Conglomerates; Theory of firm; Innovation; R&D; Mergers; Incentives;

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References

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Cited by:
  1. Joel Stiebale, 2014. "Cross-Border M&As and Innovative Activity of Acquiring and Target Firms," Discussion Papers 2014-06, University of Nottingham, GEP.

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