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

Author

Listed:
  • Jan Bena
  • Isil Erel
  • Daisy Wang
  • Michael S. Weisbach

Abstract

Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential hold- up 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

  • Jan Bena & Isil Erel & Daisy Wang & Michael S. Weisbach, 2021. "Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents," NBER Working Papers 29174, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29174
    Note: CF IO
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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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