Technological Innovation and Acquisitions

I examine whether technological innovation is a motivating factor in firms' acquisition decisions and how an acquisition (or an acquisition withdrawal) affects technological innovation in subsequent years. I find that firms engaging in acquisition activities are less innovative and have often experienced declines in technological innovation during the years prior to the bid. Among the bidders, the relatively more innovative ones are less likely to complete a deal. During the three years after the bid, successful bidders do not underperform matching firms, whereas failed bidders significantly underperform their nonbidding peers. I further find that formerly less innovative bidders benefit more from acquisitions. These findings suggest that technological innovation affects firms' acquisition decisions, and in turn, acquisitions help firms' innovation efforts.