Measuring Firm Innovation and its Relationship with IPO and M&A Activities
This paper examines the changes in firms’ innovation performance around initial public offerings (IPO) and mergers and acquisitions (M&A) using innovation data based on patent applications, new product introductions, and scientific article publications. The quantity of innovation is measured by number of innovative outputs and the quality of innovation is measured by a variety of metrics including patent or article citation count and content-based novelty score. Results generally show that innovation quantity increases while innovation quality declines following IPO and M&A events. The findings are consistent among patent-based, product-based, and publication-based metrics, and confirm with the results from previous literature. In addition, innovation performance is found to vary with financial performance and industry characteristics. Firms that exhibit larger asset and cash holdings, higher profitability, and more R&D investments are in general more innovative in terms of both quality and quantity. In post-IPO or post-M&A years, higher industry sales concentration and geographic concentration tend to correlate with lower innovation quantity and higher innovation quality. This paper also attempts to study the mobility of innovative employees around IPO and M&A, but the results lack sufficient insights on whether the observed post-event decline in innovation quality can be explained by changes in the composition of innovators. Overall, despite the ability to produce more innovations after going public or acquiring another company, firms should be mindful of the potential loss in innovation quality.