Innovations and earnings non-synchronicity: evidence from industry M&A activities

This paper investigates how earnings non-synchronicity impacts associated with firm-level research and development (R&D) investment vary as a function of industry-level mergers and acquisitions (M&A) intensity. Investing in R&D enables firms to differentiate and gain competitive advantages; differentiation strategies increase idiosyncratic variation in firms' earnings. We introduce an industry-level contextual variable, industry-level M&A, to capture variations in innovation novelty. We show that the positive relationship between R&D investment and earnings non-synchronicity is increasing in the intensity of inside‐industry M&A but not outside-industry M&A. This is consistent with our conjecture that M&A within an industry facilitate knowledge base expansion and induce more innovative R&D through complementary effects.