Bidding Wars Over R&D Intensive Firms: Knowledge, opportunism and the market for corporate control

Bidding Wars Over R&D Intensive Firms: Knowledge, opportunism and the market for corporate control
Author(s): Coff, Russell
Year: 2001
Paper Number: GBS-OM-2001-001
Goizueta Department: Organization and Management

Abstract

The knowledge-based theory of the firm (KBTF) suggests that the scope and existence of firms can be explained independent of opportunism, the driving force behind transaction cost economics (TCE). Moreover, this theory suggests that, as knowledge intensity increases, organizational boundary decisions are increasingly driven by knowledge management concerns, rather than by opportunism. Therefore, as R&D-intensity increases, the KBTF should gain explanatory power over TCE. However, this study finds that problems of opportunism increase with R&D intensity. Specifically, as R&D intensity increased, managers actively discouraged bidding wars (e.g., by granting lockup agreements), contrary to shareholder interests. Managers may even be able to buy the firm themselves at a discount since rivals are unlikely to emerge. Indeed, TCE seems to gain explanatory power as knowledge intensity grows.