|Title||Firm boundaries matter: Evidence from conglomerates and R&D activity|
|Publication Type||Journal Article|
|Year of Publication||2014|
|Journal||Journal of Financial Economics|
|Type of Article||Article|
|Keywords||COMPETITION, Conglomerates, constraints, corporate diversification, dark side, incentives, inefficient, INNOVATION, internal capital-markets, investment, MERGERS, Organizations, performance, R&D, RESOURCES, Theory affirm|
This paper examines the impact of the conglomerate form on the scale and novelty of corporate Research and Development (R&D) activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-differences estimation reveals that, relative to failed targets, firms acquired in diversifying mergers produce both a smaller number of innovations and also less-novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggest that conglomerate organizational form affects the allocation and productivity of resources. (C) 2013 Elsevier B.V. All rights reserved.