Measuring the Impact of Mergers on Innovation with a Matching Model



Innovation is one of the key motivations for mergers and acquisitions (M&A). While many studies have explored the effect of M&A on innovation output, these studies do not control for the endogenous matching between the acquirer and the target, which not only obscures the effect of integration on innovation performance, but may also yield biased estimates of the drivers of innovation output. Therefore, I study the impact of M&A on innovation using a two stage model: a matching model is used to explain the sorting of firms into pairs, and an innovation output function is linked to the matching model through error correlation. This joint specification reduces the bias in estimating the drivers of innovation output and helps determine the drivers of integration process in a merger. Using a Bayesian estimation method, the model is applied to 1895 mergers in five high-tech industries between 1992 and 2008. I find that the unobserved strategic fit between the two merging partners has a significant effect on the post-merger innovation abilities of the combined firm. Managers wisely choose merger partners that deepen their technical knowledge, but under-estimate the challenges in integrating foreign partners and partners with similar technology. I also find evidence suggesting that the effect of financial variables and breadth of knowledge on post-merger innovation output is estimated with a bias in the existing literature due to matching induced endogeneity.
Yu Yu is a PhD student in Marketing at the Johnson School since 2004. Prior to joining the PhD program, she obtained a BA in Finance from Nankai University in China, and a MA in Economics from Indiana University-Bloomington. Yu Yu's research interests include marketing modeling, econometrics, merger and acquisition, pharmaceutical industry, and innovation. In her dissertation, she develops and estimates structural models to study growth and innovation in Mergers and Acquisitions.
Contact information:
Dr. S. Puntoni