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Specialized Investments and Firms' Boundaries: Evidence from Textual Analysis of Patents

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Listed:
  • Bena, Jan

    (University of British Columbia)

  • Erel, Isil

    (Ohio State University and European Corporate Governance Institute)

  • Wang, Daisy

    (Ohio State University)

  • Weisbach, Michael S.

    (Ohio State University and European Corporate Governance Institute)

Abstract

Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential holdup problems. Such contracting difficulties have long been argued to be an important reason for acquisitions. To evaluate the extent to which this motivation leads to mergers, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the mergers. We find that patents of inventors from target firms become 28.9% to 46.8% more specific to those of acquirers’ inventors following completed mergers, benchmarked against patents filed by targets and a group of counterfactual acquirers. This pattern is stronger for vertical mergers that are likely to require specialized investments. There is no change in the specificity of patents for mergers that are announced but not consummated. Overall, we provide empirical evidence that contracting issues in motivating specialized investment can be a motive for acquisitions.

Suggested Citation

  • Bena, Jan & Erel, Isil & Wang, Daisy & Weisbach, Michael S., 2021. "Specialized Investments and Firms' Boundaries: Evidence from Textual Analysis of Patents," Working Paper Series 2021-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2021-13
    DOI: 10.2139/ssrn.3906172
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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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