R&D investment as a signal in corporate takeovers
Critics of takeovers usually argue that takeover threats may reduce target firms' R&D intensity. However, we find that under takeover threats, target firms may nevertheless increase R&D investment in order to signal their compatibility with the acquiring firm. The identity of the acquired firm depends on the market size and target firms' efficiency and compatibility. Target firms may affect this result investing in R&D. Through R&D investments, these firms signal potential outsiders the kind of competition they may face and force them to accept lower takeover offers.
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