Is Innovation a Factor in Merger Decisions? Evidence from a Panel of U.S. Firms

The impact of innovation on mergers has been a source of debate in merger enforcements. Innovative firms influence market structure by changing merger decisions, as mergers provide resources for commercialization of innovation and capturing knowledge spillovers. However, there is a limited empirical evidence on the innovation induced changes of merger likelihood. We construct panel data of mergers among publicly traded U.S. manufacturing firms from 1980 to 2003 and investigate the impact of innovation, measured by a citation weighted patent stock, on merger decisions controlling for business cycles and proxies of neoclassical, behavioural, and Q theories of mergers. We find that innovations are positively and significantly correlated with firms’ merger likelihood, and these decisions are procyclical. The positive impact of weighted patent stocks on merger decision is robust to the mixed model estimation method, and innovation effects on merger decisions vary across industries.