Merger Waves and Innovation Cycles: Evidence from Patent Expirations

Merger Waves and Innovation Cycles: Evidence from Patent Expirations

Authors

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Ran Duchin

Boston College - Carroll School of Management

Jarrad Harford

University of Washington and ECGI

Abstract

We investigate the link between innovation cycles and aggregate merger activity using data on patent expirations. We focus on patents that expire due to term expirations, which mandatorily occur at a pre-specified date. We find strong clustering in industry patent expirations (“patent expiration waves”). These patent waves trigger industry merger waves with lower announcement returns and worse long-term performance for acquirers, but higher announcement returns and larger premiums for targets. Acquirers also experience declines in profit margins, cash holdings and investment opportunities, while cutting costs in the year prior to a merger. Overall, we put forth a link, unexplored in the literature, between merger waves and patenting activity.