University of Maryland – Robert H. Smith School of Business
University of Southern California – Marshall School of Business
Gordon M. Phillips
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
February 15, 2016
We examine firm vertical integration through acquisitions and organic changes in production. We develop a new firm-specific measure of vertical relatedness and integration using 10-K product text. We find that firms in high R&D industries are less likely to become targets in vertical acquisitions or vertically integrate. These findings are consistent with firms with unrealized innovation avoiding integration to maintain ex ante incentives to invest in intangible assets and keep residual rights of control. In contrast, firms in high patenting and more mature industries are more likely to vertically integrate, consistent with ownership facilitating commercialization and reducing ex post holdup.