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Mergers and Acquisitions (M&AS) by R&D Intensive Firms

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  • Shantanu Dutta

    (University of Ontario Institute of Technology, Faculty of Business and Information Technology, 2000 Simcoe Street North, Oshawa, ON, L1H 7K4, Canada)

  • Vinod Kumar

    (Sprott School of Business, Carleton University,1125, ON K1S 5B6, Canada)

Abstract

In this study, we evaluate the impact of R&D intensity on acquiring firms’ abnormal returns by examining 925 Canadian completed deals between 1993 and 2002 that have information on R&D expenditures. While examining the returns to acquiring firm shareholders in the R&D intensive firms we evaluate two competing hypotheses: ‘growth potential hypothesis’ and ‘integration failure hypothesis’. According to the ‘growth potential hypothesis’, in light of the growth potential of the targets acquired by R&D intensive firms, investors are likely to react positively. ‘Integration failure hypothesis’ focuses on integration difficulties of a target by an R&D intensive firms and suggests that investor might be skeptical of such acquisitions and react negatively. Our results show that R&D intensity (i.e. R&D expenditure by sales) has a positive and significant effect on cumulative abnormal returns of the acquiring firms around the announcement dates. This implies that market generally favors the M&A deals by R&D intensive firms. An analysis of the differentiating characteristics reveal that R&D firms have a significantly higher growth potential and undertake more stock financed deals compared to the non R&D firms. Further, our results show that there is no significant change in long-term operating performance subsequent to the M&A deals for both R&D firms and non R&D firms. In general, our results show support for ‘growth potential hypothesis’.

Suggested Citation

  • Shantanu Dutta & Vinod Kumar, 2009. "Mergers and Acquisitions (M&AS) by R&D Intensive Firms," JRFM, MDPI, vol. 2(1), pages 1-37, December.
    • Handle: RePEc:gam:jjrfmx:v:2:y:2009:i:1:p:1-37:d:28327
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