Abstract

This thesis explores the interaction between innovation and firm valuation in high-value mergers and acquisitions (M&A) through a combined theoretical and empirical approach. A Cournot Competition Model is employed to examine how innovation, enabled by cost-reducing technologies, can increase firm profitability and rationalize high acquisition premiums. The model predicts a scenario in which rises in the variable costs of the target firm cause its value to decline, thereby formalizing the notion that operating efficiency is important for valuation. To validate this hypothesis, the study compares a global sample of 50 mergers and acquisitions transactions exceeding $1 billion, where innovation is measured by patent intensity (patents divided by revenue). Whereas the theoretical model proposes a close link between innovation and value creation, the empirical examination does not establish statistically significant proof that measures of innovation are positively associated with acquisition price. These results underscore the challenges of measuring innovation in terms of real value and confirm the importance of other factors, including absorptive capacity, strategic fit, and market context, in influencing acquisition outcomes.

Advisor

Davison, Colin

Department

Economics

Publication Date

2025

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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