IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v83y2024ics0927538x23002950.html
   My bibliography  Save this article

Can mergers and acquisitions internalize positive externalities in funding innovation?

Author

Listed:
  • Chemmanur, Thomas J.
  • Li, Leo Ang
  • Liu, Mark H.

Abstract

Fundamental innovation usually involves huge upfront costs, but the benefits are spread across various sectors of the economy. Given the large costs and limited appropriability of the benefits associated with fundamental innovations, individual firms underinvest in these innovations relative to the socially optimal level. We find that mergers and acquisitions (M&As) can internalize the positive externalities by merging firms from both the user industries and the producer industries of an innovation. Using the US patent citation dataset, we define the user and producer relationship between each pair of industries and between each pair of industry and technological class. We then show that after a merger between an innovation user and an innovation producer (related M&As), the quantity and the quality of innovation output increase, and the increase is driven by targeted technological classes. In contrast, innovation output drops after unrelated mergers. Firms' internal resource allocation and financial flexibility play an important role in determining the effect of M&As on innovation.

Suggested Citation

  • Chemmanur, Thomas J. & Li, Leo Ang & Liu, Mark H., 2024. "Can mergers and acquisitions internalize positive externalities in funding innovation?," Pacific-Basin Finance Journal, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23002950
    DOI: 10.1016/j.pacfin.2023.102224
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X23002950
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.pacfin.2023.102224?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Patents; Innovation; Mergers and acquisitions; Synergy; Technological class;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23002950. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.