Effects of R&D Investments and Signals on International Acquisitions: Evidence from IPO Firms

Abstract

We investigate how intangible assets in the form of R&D influence firms’ propensities to engage in international acquisitions. On the one hand, previous research has noted that the tacit and redeployable nature of R&D investments may enable firms to expand their operations overseas and create value from international acquisitions. On the other hand, R&D investments can raise the cost of collecting and analyzing information to evaluate firms’ resources and prospects, which can hamper their ability to finance and execute international M&A deals. In the context of international acquisitions undertaken by firms just completing their initial public offerings (IPOs), we argue and find that the IPO firm’s engagement in post-IPO international acquisition activity is generally negatively related to its R&D intensity. This effect contrasts previous arguments on the internalization advantages possessed by R&D-intensive firms. However, firms having market signals on their resources and prospects can mitigate information problems and carry out cross-border acquisitions. We therefore identify an unexamined tradeoff that intangible assets present in the international M&A context and how market signals can facilitate cross-border transactions.