The Effect of R&D on Merge Acquisition – The Role of Corporate Liability

This paper examines the effect research and development (R&D) expenditures on the likelihood of being a takeover target firm in the merge and acquisition (M&A) by focusing on the corporate leverage. Namely, this article proposes potential intersection effect between the R&D expenditure and leverage on the takeover probability. There are two hypotheses in the study, one is “High R&D firms have higher merger probability to be M&A targets”, the other is “But high R&D firms with high lability are not M&A targets”. The empirical evidence shows a negative intersection effect between R&D expenditure and leverage when M&A deals are completed. Moreover, the negative effect is found when current debt is measured as the leverage variable. The effect of leverage on the relation between R&D and takeover probability is gone when I focus on the M&A withdrawal cases. The explanation might be when the merge target firm has high level of current debt, the more R&D expense may bring more concern to the merger because of liquidity concern. Accordingly, the firm may unwilling to bear the current debt of the takeover target under this situation.