Unpatented Innovation and Merger Synergies

Unpatented Innovation and Merger Synergies

Messod D. Beneish

Indiana University - Kelley School of Business - Department of Accounting

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Ayung Tseng

Indiana University

Patrick Vorst

Maastricht University School of Business and Economics

Abstract

The increasingly service-based U.S. economy places a high reliance on innovation. While there is considerable research on the importance of certain innovative activities such as patents, less attention has been paid to un-patented innovation, about which there is naturally less publicly available information. Our research leverages a unique merger and acquisition database that reveals the fair values of targets’ innovative activities. We show that existing studies underestimate the contribution of innovation by exclusively focusing on patents. Our evidence, for example, shows that approximately three percent of merger synergy value is associated with patented innovation, whereas the less often studied un-patented innovation accounts for twelve percent of synergy gains.