Combining the obvious : linking absorptive capacity and CIO/CTO presence to post-M&A innovation performance

Master Thesis

Combining the obvious: linking absorptive capacity and CIO/CTO

presence to post-M&A innovation performance

Student: Oscar Greven / Student No: 11884797

MSc. Business Administration, Strategy Track University of Amsterdam

Faculty: Amsterdam Business School Supervisor: Andreas Alexiou

University of Amsterdam

Faculty: Amsterdam Business School

Date: 22nd

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This document is written by Student Oscar Greven who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

This empirical paper extends prior studies by examining the direct relationship of absorptive capacity on a firm’s post-M&A innovation performance. Additionally, it proposes that the Chief Information Officer (CIO) and the Chief Technology Officer (CTO) have become key figures in the absorptive capacity and innovation process of a firm. This fresh perspective is analyzed and based upon the upper echelons theory. A multiple regression analysis of M&As in the US high-technology sector was conducted to test the hypotheses. The results reveal that absorptive capacity has a direct positive effect on post-M&A innovation performance. Furthermore, the CIO/CTO was found to have no interaction effect on the main relation but uncovered to have a significant direct impact on the post-M&A innovation performance.

Keywords: innovation performance, absorptive capacity, mergers and acquisitions, chief technology officer, chief information officer, technology

Table Of Contents

1. INTRODUCTION ... 5

2. LITERATURE REVIEW ... 9

2.1 POST-M&A INNOVATION PERFORMANCE ... 9

2.2 TECHNOLOGICAL ACQUISITIONS ... 12

2.3 MEASURING FOR INNOVATION PERFORMANCE ... 13

2.4 ABSORPTIVE CAPACITY ... 14

2.5 ABSORPTIVE CAPACITY AND POST-M&A INNOVATION PERFORMANCE ... 16

2.6 MODERATING FACTORS ... 17 2.7 CIO/CTO PRESENCE ... 19 3. HYPOTHESES ... 22 4. METHODS ... 26 4.1 SAMPLE ... 27 4.2 INDEPENDENT VARIABLE ... 28 4.3 DEPENDENT VARIABLE ... 29 4.4 MODERATOR ... 30 4.5 CONTROL VARIABLES ... 31 4.6 STATISTICAL ANALYSIS ... 32 5. RESULTS ... 33 5.1 DESCRIPTIVE STATISTICS ... 33 5.2 REGRESSION ANALYSIS ... 35 6. DISCUSSION ... 37 6.1 MAJOR FINDINGS ... 37 6.2 CONTRIBUTIONS ... 39 6.4 LIMITATIONS AND FUTURE RESEARCH ... 41 7. CONCLUSION ... 43 8. REFERENCES ... 44 APPENDIX ... 52

1. Introduction

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change” (Charles Darwin, 1809).

Google, the most valued brand worldwide in 2017, made its largest acquisition ever by buying Motorola Mobility for $12.5 billion in 2012 (Statistica, 2017). The motivation for this deal was the more than 17,000 patents issued and 6,800 patents owned by the target firm (The Economist, 2012). In the last decade’s rising competitive pressures and swiftly changing environments, the ability to successfully innovate is viewed as crucial to maintaining competitiveness and essential to company growth and survival (Ince et al., 2016; Adner and Kapoor, 2010; Dougherty, 2008; Hung 2004; Hall, Jaffe, and Trajtenberg, 2005). For most firms it is difficult to adapt to the changing environment solely by relying on internal research and development (R&D) to reach desirable innovation performance. Therefore, top managers in many firms focus on acquiring external knowledge to improve their innovation performance and gain higher economic returns, particularly in high-tech firms (Kang et al., 2015; Tsai and Wang, 2008).

Although external knowledge acquisition is a common strategy to obtain innovation, firms often fail to create innovations from it (Orsi et al., 2015; Kang et al., 2015). Prior research has emphasized that only acquiring external knowledge through mergers and acquisitions (M&As) is not sufficient to produce an increase in innovation performance (Cloodt et al. 2006; Makri, 2010; Ahuja and Katila, 2001). In order to effectively translate externally sourced knowledge and technology into positive innovation performance of the acquiring firm, the company needs to possess a degree of “absorptive capacity” (Ahuja and Katila, 2001; Kang et al., 2015; Makri et al., 2010). Absorptive capacity is the ability of an organization to acquire knowledge, assimilate it, and apply it (Cohen and Levinthal, 1990).

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Therefore, this research states that absorptive capacity is vital to achieve higher post-M&A innovation performance.

The topic of the effect of M&As on innovation performance has been researched extensively. Nonetheless, the majority of the literature that has been studying this relationship found incoherent and sometimes conflicting outcomes (Henderson and Cockburn, 1996; Fisch, Block, and Sandner, 2017; Ahuja and Katila, 2001; Cloodt et al., 2006; Makri et al., 2010; Valentini, 2012; Han, Jo, and Kang, 2016). For example, Hitt et al. 1991 and Hitt et al. (1996) found that a firm’s acquisition intensity negatively correlates with its innovativeness. According to their research, acquisitions would divert manager’s attention from other activities and diminish their commitment to long-term investments. In contrast, Ahuja and Katila, 2001, Makri et al., 2010, and Cloodt et al., 2006, document a positive effect of acquisitions on innovation performance. Authors argue that the outcomes of the literature on this topic are contrasting and therefore require further research (Tarba, Ahammad, Junni, Stokes, and Morag, 2017; Ahuja and Katila, 2001; Makri et al., 2010; Tsai and Wang, 2005; Cloodt et al., 2006).

Not all acquisitions intensify innovation performance. Non-technological M&As do not affect the creation of innovation and provide no technological inputs to the acquiring firm (Jo et al., 2016; Ahuja and Katila, 2001; Cloodt et al., 2006). Therefore, this study aims to exclude non-technological-driven deals. The study focuses on deals from the high-tech sector, a knowledge-intensive industry with the highest rate of innovations (Makri, 2010).

Since M&As are characterized by the integration of knowledge bases of the two firms, much of the research has studied the effect of knowledge characteristics impacting the acquisition-innovation performance relationship (Orsi et al., 2015; Ahuja & Katila, 2001; Cloodt et al., 2006). Accordingly, current literature mainly studied knowledge characteristics of the target and targeting firm as moderating effects while it omits other possible variables

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that could influence this relationship. As the integration of knowledge is strongly related to absorptive capacity, most of the studies use those terms interchangeably (Han, Jo, and Kang, 2016). However, past research has argued that a firm’s ability and process of integrating and absorbing knowledge largely depends on its leadership (Verona, 1999; Floyd and Lane, 2000; Tarba et al., 2017). Various studies claim that senior managers play a dominant role in the process of acquisitions to improve innovation performance (Pisano, 1997; Tarba et al., 2017; Galasso and Simcoe, 2011; Thong and Yap, 1995). They imply that a firm’s innovation strategies result from characteristics of its top managers, as they are the most powerful actors within the organization. Two relatively new positions in contemporary top management teams (TMTs) are the chief information officer (CIO) and the chief technology officer (CTO). With their predominant expertise in information technology (IT) these new functions contribute to a more heterogeneous team, and are therefore likely to impact firm performance according to the upper echelons theory (Hambrick and Mason, 1984). Additionally, the effect of having a CIO/CTO in a TMT has been researched insufficiently in academic literature and requires further research (Medoc and Lee, 2017; Ranganathan and Sanjeev, 2008). More specifically, the impact of CIO/CTO presence on post-M&A innovation performance has even been neglected so far. Consequently, this research aims to illuminate and analyze the effects of a having a CIO/CTO in the TMT in relationship to firm innovation performance and its interaction effect with the firm’s absorptive capacity.

This research builds upon the principles of the upper echelons theory. This particular perspective states that managers’ background characteristics are a decisive factor in their knowledge and decision-making (Hambrick and Mason, 1984). Furthermore, the resource-based view and knowledge-resource-based view are used as the founding principles for the two variables: CIO/CTO presence and absorptive capacity (Barney, 1991; Prahalad and Hamel, 1994; Porter, 1991).

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This study aims to contribute to the current literature on technological M&As and innovation performance in two ways. First, this study plans to contribute to the incoherent literature on absorptive capacity and M&As by providing a new angle that analyzes the direct impact of absorptive capacity on post-M&A innovation performance. Second, while the majority of studies in this field have tested the moderating effect of knowledge characteristics, this study enlarges the field by testing the moderating effects of CIO/CTO presence by connecting to the upper echelons theory of Hambrick and Mason (1984). Outcomes could potentially serve as tools to be used by future researchers within this domain to supplement their research. On a practical level, strategists within high-tech firms could benefit from this study when contemplating engaging in technological acquisition activities, when attempting a higher innovation performance, or when considering opening a CIO/CTO position in the TMT.

By researching the relationship between absorptive capacity and firm innovation performance, I am extending the current literature that remains ambiguous and suggesting further research on this topic (Ahuja and Novelli, 2014; Orsi et al., 2015; Ahuja and Katila, 2001; Makri et al., 2010; Cloodt et al., 2006). Additionally, I will contribute to the existing literature by considering the moderating effect of CIO/CTO presence in the TMT. Since the CIO/CTO position has proven to have noteworthy impact on a firm’s innovation, absorptive capacity, and performance (Saldanha and Krishnan, 2011; Ranganathan and Sanjeev, 2008; Tarba et al., 2017; Pisano, 1997; Floyd and Lane, 2000), it is reasonable to infer that this senior position intensifies or attenuates the effects of absorptive capacity on post-M&A innovation performance. However, extant literature on absorptive capacity and innovation performance has neglected this potential factor. The aim of this research is to provide an in-depth understanding of the mechanisms of absorptive capacity on firm innovativeness, while

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considering the moderating effect of CIO/CTO presence. Therefore, the research question this paper aims to answer is the following:

How are “absorptive capacity” and “CIO/CTO presence” related to post-M&A innovation performance?

The structure of this paper is as follows. First, a literature provides a thorough analysis of the background of the variables included in this study. Second, the hypotheses will be

provided, corresponding with the conceptual model. Then, the methods section of this paper is discussed where a detailed explanation of the variables is provided. Fourth, the results of the quantitative data analysis are reviewed. Fifth, the discussion will be provided containing the interpretation of the results, contributions, and the limitations and future research. The final part of this study covers the conclusion.

2. Literature Review

2.1 Post-M&A Innovation performance

The topic M&As and its impact on firm innovativeness has been a quite fascinating topic for researchers and in practice in the last two decades. The main motive of firms to acquire other firms nowadays is to acquire innovation. Holmström and Roberts (1998) state that most mergers and acquisitions transactions are made to source innovation. The term innovation can be interpreted as an extension of the word “invention”. “Invention comprises the basic and applied research that is yet unexploited in the marketplace. Instead, innovation involves the exploitation of an invention through product development, manufacturing, marketing, distribution, and after-sales service” (Makri et al. 2010, p. 604). Bloom and Van Reenen (2002) study firm innovation by patenting activity of the firm and the results show that it has an economically and statistically significant impact on market value and firm-level productivity. Given this fact, innovation proves to be of major importance to contemporary

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firms. Aghion and Tirole (1994) state that firms, who lack this ability to innovate internally, could make acquisitions of other firms that are more innovative in order to increase their own innovativeness.

Literature results and stances whether acquisitions have a positive relation with firm innovation output have been rather ambiguous. Surrounding this topic there are two main streams of literature. The first suggest that acquisitions have positive impact on innovation and this is achieved by expanding the acquirer’s knowledge base when acquiring another firm (Henderson and Cockburn, 1996; Ahuja and Katila, 2001; Cloodt et al., 2006; Makri et al., 2010; Valentini, 2012; Han et al. 2016; Cefis, Marsili, and Rigamonti, 2015). Mostly this is explained by the extant literature as a result of different knowledge bases amongst firms and can lead according to the resource-based view to a sustainable competitive advantage (Bierly and Chakrabarti, 1996; Barney, 1991). The resource-based view is a theory that offers an explanation for how firms can sustain a competitive advantage (Barney, 1991). In that perspective, the resources of a firm are crucial in the process of generating value-creating processes, which in turn can create a competitive advantage (Eisenhardt and Martin, 2000). From a resource-based view perspective, M&As can be interpreted as a way to obtain new technologies, capabilities, and resources. In order for a firm to innovate it must create novel processes, products, or technologies (Ahuja and Novelli, 2014). By incorporating M&A strategies a firm can achieve such new resources and capabilities and thereby increase its innovation performance. Fleming (2001) argues that the innovation performance can be increased based on the resource-based view in two distinct ways. Firstly, the firm will be offered access to new knowledge, capabilities, or technological resources. Secondly, by acquiring non-technological resources such as commercialization competences a firm could also potentially stimulate the acquirer to use existing resources differently and thereby create innovations.

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Yet, it is shown by Fisch, Block, and Sandner (2017), who build on the study of Ahuja and Katila (2001) and Cloodt et al. (2006), that this is not always the case. They found that there was no significant effect of acquisitions on the innovation output of Chinese acquiring firms. According to the other literature stream, acquisitions can also disrupt the current business by destabilizing routines, which reduce efficiency and thus innovation output (Jemison and Sitkin, 1986). Additional research also found that acquisitions could have negative influence on innovative output by being disruptive in nature and disturb current routines and control mechanisms of the firm (Hitt et al., 1991, 1996). At individual level, Ernst and Vitt (2000) show that acquisitions can result in important inventors leaving the company. Obviously, inventors leaving the firm will most likely have a strong negative impact on the firm’s innovation performance. Similarly, Kapoor and Lim (2007) find that the productivity of inventors is often negatively impacted by acquisitions. However, according to Harrison et al. (2001) and Harrison et al. (1991) the two main perspectives of positive and negative impact on the relationship are complementary. They suggest having complementary resources is a necessary but insufficient condition to achieve synergy. Resources should be efficiently and effectively combined and managed in order to achieve the synergy. Moreover, Kang et al. (2015) state that technology acquisitions have to be seen as a double-edged sword and managers need to be aware of the potentially negative effects of technological acquisition on innovation performance. Stahl (2010) also emphasizes the negative effects of acquisitions on innovation performance. That paper states that the decline of innovation after an acquisition is due to the motivation of the acquisition. Most acquisitions are motivated by the desire to reduce competition instead of capturing external information (Stahl, 2010).

2.2 Technological acquisitions

The particular type of acquisition studied in this research is technological acquisitions. This form of acquisitions and the evaluation of its performance have received only limited attention in prior studies (Ahuja and Katila, 2001). The literature that has studied technological acquisitions is quite clear and concurrent on the explanation of this term. Ahuja and Katila (2001) make a distinction between technological acquisitions: acquisitions in which technology is a component of the acquired firm’s assets, and non-technological acquisitions: acquisitions that do not contain a technological components. Further they state, “Technological acquisitions are acquisitions that provide technological inputs to the acquiring firm. Thus, they potentially expand the acquirer’s knowledge base and provide scale, scope, and recombination benefits” (Ahuja and Katila, 2001, p. 199). Makri et al. (2010) describe technological acquisitions as a form of acquisitions where the technological resources of the potential target are high. According to Bower (2001) and Inkpen, Sundaran, and Rockwood (2000) this type of acquisition involves technical motives such as obtaining: highly developed technical expertise and R&D skills, technical experienced personnel, and specific new technologies. The motive of the acquisition is imperative to the outcome of the acquisition on innovation performance is suggested by Ahuja and Katila (2001). In a non-technological acquisition there are more costs than benefits, since they tend not to add much synergies to the acquiring firm but only disruption in existing routines, which lowers its productivity. Therefore, technological acquisitions seem to be more relevant to the innovation process since the motive is to obtain complementary resources and exploit synergies between the two firms.

2.3 Measuring for innovation performance

Current literature uses multiple proxies to measure for innovation performance. One way is by measuring the R&D expenditures, or R&D intensity. Hitt et al (1991) and Stiebale (2013) use this in their research to measure for innovation performance. R&D expenditures are often used and influence the firm’s innovation performance and can thus be considered as an innovation input measure. This happens through the direct influence it has on the development of ideas within the company and thereby the output of patents and products is affected as well. The second way of measuring innovation performance is by examining number of patents issued, this is the most widely used indicator of innovation performance and concerns the innovation output instead of input. Even though this number is not always accurate to predict innovation performance because not all patents will lead to an innovation. This “patent count”, is amongst others used by Makri et al. (2010) and considered to be the most direct measure of innovation quantity and innovation productivity (Makri et al., 2010). However this measuring tool takes time as the process of an idea turning into a patent can take a long time. Third, some researchers are opting for a more in depth measure that has additional meaning to it and therefore patent citations can be used. The previously discussed patent count measure is not a guarantee for patenting quality and therefore more and more studies are using patent citations as a measure for innovation performance. Patent citations can be used to measure the quality of the innovative output (Hagendoorn & Cloodt, 2003). Lastly, it is argued that patent count and patent citation are unsatisfactory measurements, as some patents do not have any impact on innovation. Therefore, some studies use “new product announcements” as measurement for innovation, the downside of using this proxy is that those announcements are done by the companies themselves and therefore lack a screening process, unlike patents (Hagedoorn & Cloodt, 2003).

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2.4 Absorptive capacity

In 1989 Cohen and Levintal introduced the concept of absorptive capacity where they defined it as the firm’s “ability to recognize the value of new external information, assimilate it and apply it to commercial ends” (Cohen and Levinthal, 1989). They argue that prior obtained knowledge and diversity of background affect the degree of absorptive capacity. The evaluation and utilization of externally obtained knowledge is a function of prior knowledge (Cohen and Levinthal, 1990). Prior knowledge is described as the cumulative, either tacit or explicit knowledge a person or an organization possesses. So, absorptive capacity can be seen as the cumulative of the function of prior knowledge of the employers within the organization. Therefore, the absorptive capacity of a firm depends heavily on the ability of the individuals of the organization to recognize valuable external knowledge as a function of their prior knowledge. Additionally, Cohen and Levinthal (1989) emphasized that diversity within teams positively impacts the absorptive capacity. Diversity is being encouraged because this will result in cooperation where individuals are exposed to new associations and different insights.

In the framework of Cohen and Levinthal (1990) the ability to develop absorptive capacity is highly dependent on the investments a firm makes in research and development (R&D). Such investments will foster the creation of a diverse knowledge base that helps the absorption of knowledge from a wide variety of external sources (Cohen and Levinthal, 1990; Afuah, 2002). Also, the firm’s absorptive capacity can grow as a result of the efforts of internal R&D teams. Therefore, when a firm invests in R&D it will directly impact its absorptive capacity. So, it can be stated that the higher the investments of a firm in their R&D the greater the likelihood of successful handling of new external knowledge. Moreover, empirical studies surrounding the topic of absorptive capacity widely support “R&D

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expenditures” as a proxy for measuring absorptive capacity (Tsai, 2001; Lane, Koka, and Pathak; 2006; Lin et al., 2012).

Zahra and George (2002) expanded the absorptive capacity construct by linking it to a set of organizational routines and processes through which firms acquire, assimilate, transform, and exploit knowledge with the goal of designing a dynamic organizational capacity. They make a distinction between potential and realized absorptive capacity. Potential absorptive capacity (or PACAP) includes the ability of a firm to acquire and assimilate external knowledge. The realized absorptive capacity (or RACAP) consists of the transformation and exploitation of the external obtained knowledge (Zahra and George, 2002). Moreover, they argue that potential and realized absorptive capacities are two independent but complementary components of absorptive capacity. For example, firms cannot exploit the external knowledge without acquiring it and they will also not be able to translate an acquisition into a competitive advantage without transforming and exploiting it. Since the article of Zahra and George (2002) researchers of absorptive capacity have embraced the process stages that are incorporated in the model. Nonetheless, to empirically measure all different stages individually remains difficult, especially in quantitative research (Schildt et al., 2012). Therefore this study will focus on the absorptive capacity construct as a whole where all stages will be considered simultaneously.

So, various studies have been researching the absorptive capacity concept although a substantial lack of clarity remains. This lack of clarity was already mentioned by Cohen and Levinthal (1990) and it still remains an elusive concept in the contemporary literature. For example, Orsi et al. (2015) state that the construct of absorptive capacity has been researched quite extensively but the absorption of external knowledge into the acquiring firms remains vague in current studies and is being treated as a sort of black box.

2.5 Absorptive capacity and post-M&A innovation performance

The strategic use of M&As to obtain new external knowledge and capabilities in order to grow their business has continued to grow over the last decades (Cloodt et al., 2006; Jo et al., 2016; Hagedoorn and Duysters, 2002). Despite their gain in popularity, M&A outcomes show mixed results (Rossi, Tarba, and Raviv, 2013) and according to Kang et al. (2015) most companies even fail to create any innovations from it. Literature on innovation performance argues that the amount of benefits reaped from the M&A are highly dependent on the absorptive capacity of the acquiring firm (Ahuja and Katila, 2001; Cloodt et al., 2006; Lin et al., 2012). As discussed in the previous part, absorptive capacity is the ability of an organisation to acquire knowledge, assimilate it, and apply it (Cohen and Levinthal, 1990). Also, they suggest that absorptive capacity is crucial when adapting to changes in the external environment, sustain competitive advantages, and stimulate innovations (Ben-Menahem et al., 2013). Hence, they state that absorptive capacity will increase the chance of improved innovation performance.

Even though the significance of the absorptive capacity construct is recognized in the external knowledge acquisition literature, the amount of studies investigating this construct in relation to acquisitions remains low. Jo et al. (2016) investigate the innovation creation through technological M&As based on the concept of absorptive capacity. They focus on the similarities between technologies of the firms and the moderating role of previous M&A experience of the acquirer. They argue that technology similarity and technological digestibility is influencing the absorption and integration of the acquired knowledge. Moreover, knowledge similarities between the acquired and acquiring firm are closely linked to absorptive capacity of the acquiring firm. Also, Ahuja and Katila (2001) add to the literature by studying the contributing factors to the relation of innovation performance and M&As. They have claimed that technological acquisitions strengthen a company’s knowledge

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base and therefore the absorptive capacity of a firm. They show that the innovation performance after an acquisition is maximized when the knowledge distance between the two firms is moderate. Because of this moderate overlap in knowledge the acquiring firm is still able to interpret, use, and process the external obtained information. On the other hand, due to the partial overlap there is still new knowledge for the acquirer to be obtained. Moreover, Cloodt et al. (2006) research the knowledge bases of both acquirer and acquired firms, they state that when a firm grows its internal knowledge base by acquiring knowledge it can use this knowledge to generate new innovations. Also, the expansion of this knowledge base will add to the firm’s ability to spot the value of external information, to assimilate it, and exploit it to commercial ends. Cloodt et al. (2006) study technological M&As and argue that in those M&As a large relative size of acquired knowledge base is reducing innovation performance of the acquiring firm. Furthermore, the absolute size of the knowledge base is only positive during the first years of the acquisition. Lastly, they find that acquirers should target M&A partners that are neither too unrelated nor too related in terms of knowledge base. The knowledge base argumentation is based on the idea that a firm’s absorptive capacity mainly depends on its level of knowledge in a particular field (Cloodt et al., 2006). Another study that researches the absorptive capacity construct in relation to innovation performance is the article by Tseng et al. (2011). Besides investigating the effects of knowledge spillover and knowledge input they document a positive effect between absorptive capacity and innovation performance in the knowledge-intensive business services industry in Taiwan.

2.6 moderating factors

The moderating factors that could affect this relationship of absorptive capacity and post-M&A innovation performance has not been research extensively and should be expanded upon (Makri et al., 2010). Moreover, the current literature on this topic has a quite narrow

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focus on variables that could influence this relationship. The existing research has mainly focussed on the effect of acquisitions on the size of the acquirer’s knowledge base how this influences firm innovativeness (Makri et al., 2010). By using this moderating effect of knowledge base relatedness the articles draw upon the absorptive capacity theory of Cohen and Levinthal (1989, 1990). Absorptive capacity is the ability to recognize the value of new information, assimilate it, and apply it to commercial ends (Cohen and Levinthal, 1990). For example, the research of Ahuja and Katila (2001) concentrated on the effects of external acquisitions on firm’s innovativeness with the moderating effects of knowledge base size. Their data was obtained from the chemical sector and revealed that the absolute size of the knowledge base of the acquired firm enhances innovation. Additionally, their study showed that technological M&As have a positive impact on the acquiring firm’s innovative performance. Also Cloodt et al. (2006), which obtained its data from a sample of 347 firms from four different high-technology sectors focused on knowledge base relatedness. They found evidence to support the foregoing outcome of Ahuja and Katila (2001). Makri et al. (2010) have extended the literature by studying the complementary instead of the similarity of the knowledge base and its impact on firm innovativeness. They emphasize that acquirers should aim for acquisitions based on knowledge complementarity just as much as knowledge similarities. Han, Jo, and Kang (2016) build further on the articles of Makri et al. (2010) and Cloodt et al. (2006). Their results show that the knowledge overlap in technological acquisitions is essential for improving innovation performance. Additionally, some researchers acknowledge the fact that other moderators can be of influence as well. For example, Tarba et al. (2017) show that the organizational cultural differences between the acquired and acquiring firm positively influences the innovation performance.

2.7 CIO/CTO presence

In the previous two decades’ companies rely more and more on technology to be competitive and profitable. Information technology has moved from a back-office position to a more prominent position within the business operations (Koertze and Von Solms, 2014). Therefore, various companies decided to create a Chief information Officer (CIO) and/or a Chief technology officer position in the management team (Medcof and Lee, 2017; Ranganathan and Sanjeev, 2008; Hu et al., 2014). Despite the many different activities a CIO/CTO can take care of, depending on the organization it is in, the CIO and CTO can both be described best as the bridge between the IT and business positions (Varajao et al., 2017; Ashmore, 1989). The technicalities of IT will be removed by the two roles and presented to the management team as a tool for realizing strategic objectives.

Overall, the literature of external acquisitions and innovativeness has conducted extensive research on the effect knowledge characteristics between firms. As described in previous conducted studies absorptive capacity is having significant moderating effects on the process of technological acquisition until innovation performance. However, the process of absorptive capacity is said to most likely to be influenced by top management (Pisano, 1997). He stresses the dominant role of senior managers (also called top managers) in shaping technological capabilities through decisions and actions during the process of technological acquisitions until innovation. Furthermore, Verona (1999) states that senior agents are directly linked with capabilities for absorbing new external knowledge. Floyd and Lane (2000) agree with this and emphasize the potential of managerial action in absorptive capacity. Also Tarba et al. (2017) emphasize that both pre-and post-M&A integration are complex phenomena where specifically leadership and management belong to the crucial factors which help to reduce the risk of ineffective post-acquisition integration. For this integration a degree of absorptive capacity is needed which in turn enables the firm to better adapt in changing environments

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and create a competitive advantage (Hambrick and Mason, 1984; Wiersema and Bantel, 1992).

Current literature has been almost neglecting the relationship between TMT individuals and post-M&A innovation performance since no studies have been conducted on this topic so far. However, Ranganathan and Sanjeev (2008) did focus their study on the question whether a CIO affects a firm’s financial and market performance. The sample used consisted out of 205 firms from different industries in the United States. While performing their analysis they find evidence of firms who did have a CIO in their top management teams had a significant better firm performance than firms who did not. They explain this effect stating that a CIO would add to the diversity and heterogeneity of the management team, which will lead to a higher firm performance. They conduct their research based on multiple proxies relating to firm performance, such as financial performance ratios and market value performance (Tobin’s q). They conclude their research by suggesting future research to investigate other sorts of firm performance indicators and to conduct more research on this new topic of the leadership and firm performance literature. Saldanha and Krishnan (2011) have conducted another study where the role of a CIO in the management team is considered in relationship to the business innovation processes. The aforementioned authors state that the role of the CIO is essential in shaping the conditions that facilitate innovation by leveraging IT. Therefore, Saldanha and Krishnan (2011) state that a CIO should report directly to the CEO and find that this will stimulate business innovation. Lastly, they suggest future research should focus on the role of a CIO in regards to innovation as this topic is understudied in the extant literature (Saldanha and Krishnan, 2011). A more recent study that was conducted by Hu et al. (2014) found that CIO presence in TMTs leads to IT-business alignment and diversity, which in turn leads to a better firm performance.

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On the contrary, there is another stream of literature that questions the positive impact of a CIO on firm performance and innovation. This could potentially be explained by the fact that several practitioner-oriented commentaries argue that CIOs fail to provide significant value to firms and are actually obsolete (Ross and Weill, 2002; Maruca., 2000). Other research states that the CIO has a vast amount of different tasks or roles where in some firms they do not focus on the integration of the new knowledge, which would result in no facilitation of the absorptive capacity process (Weil and Woerner, 2013; Beatty et al., 2005).

According to Preppard (2010) currently there is a great misunderstanding about the role of CIOs and they are often incorrectly blamed for the IT struggles contemporary firms are facing. Chun and Mooney (2009) explain that the CIO function can differ significantly in job description varying per company and describe four different categories of responsibilities of a CIO. The first role is the category “Triage nurse/fire-fighter”, this type of CIO would mainly focus on fixing urgent information system problems and it is not occupied with the integration of new external knowledge. Secondly, the “landscape cultivator” has the responsibility for technical improvement of the firm’s data by sustaining and integrating processes. The third category is called the “opportunity seeker”. The role of this particular CIO is to improve internal and external business processes and can be seen as a network builder and collaborator. The last role, which is the “innovator/creator” category are CIOs that will primarily focus on innovations and new opportunities and who can be viewed as the strategic influencers.

The current literature has not yet shed light on the role of a CTO and its impact on post-M&A innovation performance yet. However, various articles are interested in the relationship between CTO presence and firm performance. For example Adler and Ferdows (1990) how that a CTO function is not just a fad or fashion like critiques say. They find that CTOs do play significant roles in facilitating technological processes, capitalize on new opportunities, and

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organizing the skills and resources that are needed to exploit these innovations. Another study regarding the CTO and the firm’s performance is performed by Medcof (2008). An indirect relation on firm performance was found as the CTO can have significant influence on the organization’s strategy. It was found that the CTO would have insufficient impact on the organization’s strategy when solely relying on its “techspertise”, instead its informal relations are largely important and the CEO decision-making style can strengthen or weaken this relationship as well. A more recent study conducted by Medcof and Lee (2017) investigated the role of CTOs and R&D expenditures on firm performance. When combining both R&D expenditures and a CTO in the board they find a significant positive relationship on firm performance. However, a CTO will not improve firm performance over the long run when R&D expenditures are low.

Consequently, a number of studies have looked at the role of a CIO/CTO in the TMT and its effects on the business performance (Banker, Pavlou and Luftman, 2011; Saldanha and Krishnan, 2011; Hu et al., 2014; Medcof and Lee, 2017; Medcof, 2008; Adler and Ferdows, 1990). However, the effect of having a CIO in the management team on post-M&A innovation performance has been rather neglected. Consequently, the current literature leaves a gap where CIO/CTO presence has been underestimated as a moderating factor in this relationship.

3. Hypotheses

Innovation has been mentioned by multiple studies as one of the main reasons for companies to perform M&As (Chesbrough, 2003; Ahuja and Novelli, 2014). Contemporary firms continue to invest in M&As since they believe that acquiring new external knowledge will improve their innovation performance. This view is derived from the resource-based view and the knowledge-based view where a broader knowledge base will foster innovation

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capabilities by expanding the resources of a firm and consequently lead to a sustainable competitive advantage (Porter, 1985; Cloodt et al., 2006; Barney, 1991; Christensen, 2011). However, only a small percentage of the firms are able to translate acquisitions into a sustainable competitive advantage (Kang et al., 2015; Lin et al., 2012). Literature on innovation performance argues that the amount of benefits reaped from the M&A are highly dependent on the absorptive capacity of the acquiring firm (Ahuja and Katila, 2001; Cloodt et al., 2006; Lin et al., 2012). Nevertheless, this absorptive capacity is a very complex construct that can even be considered as a black box (Orsi et al., 2015). Absorptive capacity is defined as the firm’s “ability to recognize the value of new external information, assimilate it and apply it to commercial ends” (Cohen and Levinthal, 1990). So, when firms possess this particular skill it allows them to use the knowledge obtained and convert this to outputs having economic value, such as innovations (Ince et al., 2016; Lin et al., 2012). Moreover, firms enjoying absorptive capacity are able to assimilate and exploit the externally obtained knowledge from the M&A, which in turn will increase their innovation output (Orsi et al., 2015; Ahuja and Katila, 2001; Makri et al., 2010; Tsai and Wang, 2015; Junni and Sarala, 2013). Companies with higher degrees of absorptive capacity can expect to be more effective and able to gain more profits when exploiting the newly absorbed knowledge (Tsai, 2001). Therefore, this research states that absorptive capacity is a vital attribute of a company to achieve higher post-M&A innovation performance. Hence, the first hypothesis of this study is:

H1: A higher absorptive capacity of the acquiring firm is positively related to its post-M&A innovation performance.

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Current literature on M&As have been fairly consistent in arguing that acquiring another firm can be viewed as the absorption of the target firm’s knowledge base into the acquiring firm’s knowledge base and will therefore be beneficial to the acquirer’s innovation performance (Ahuja and Novelli, 2014; Orsi et al., 2015; Ahuja and Katila, 2001). However, the success rate of M&As is low and this is due to the complexity of the knowledge absorption process. Firms are seeking to master the absorption of external knowledge in order to exploit this and create a competitive advantage. According to Zahra and George (2002) assimilation is a prerequisite in establishing absorptive capacity and allows a firm to analyze, process, interpret, and understand the information obtained from external sources. We argue that this assimilation process can be strengthened by the presence of a CIO/CTO in the TMT since the CIO/CTO has a clear understanding of the information technologies, which is needed in the assimilation and integrating process (Zahra and George, 2002; Smaltz et al., 2006; Medcof, 2008; Adler and Ferdows, 1990). Furthermore, Smaltz et al. (2006) state that a CIO with strategic IT knowledge will be of great importance in integrating, assimilating, and managing acquired information technologies. Additionally, the exploitation of the obtained knowledge requires mutual understanding among members of the firm (Zahra and George, 2002). Among others Hu et al. (2014) state that in most firms TMTs lack information technology knowledge and therefore there is no or a weak IT governance. By having a CIO/CTO in the TMT firms the mutual understanding can be fostered since one of the CIO/CTOs functions is to bridge the gap between IT professionals and TMT (Varajao et al., 2017; Ashmore, 1989). Hence, this study argues that the CIO/CTO will positively contribute to the innovation performance of a firm after M&As since it will facilitate the absorptive capacity process by increasing the ability to assimilate and exploit external obtained knowledge more effectively.

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On top of this we argue from the upper echelons theory that a CIO/CTO would add to the diversity and thus the heterogeneity of the TMT (Ranganathan and Sanjeev, 2008). Many scholars see TMT diversity as one of the most important predictors for innovative performance (Alexiev et al., 2010; Bunderson, 2003; Talke et al., 2010). According to the upper echelons theory by Hambrick and Mason (1984) the performance of an organization is reflection of its top managers cognitive frames, which are shaped by their education, experience, values and functional background (Smith et al. 1994). One of the most important features of this theory is that it claims a higher diversity within the TMT will lead to better information processing. This will lower the bounded rationality and therefore better decisions can be made, which in turn will lead to an increased firm performance. Besides, Cohen and Levinthal (1989) state that prior obtained knowledge and diversity of background positively affect the degree of absorptive capacity. Especially in innovation focused firms diversity is likely to be of great importance. Various studies argue that diversity will foster different views and therefore improve creativity and innovation (Ostergaard et al., 2011). “Individuals with diverse knowledge structures” can “augment the organization's capacity for making novel linkages and associations- innovating beyond what any one individual can achieve” (Cohen and Levinthal 1990, p. 133). Besides, according to Banker et al. (2011), Medcof (2008), and Medcof and Lee (2017) the CIO/CTO exists to promote IT initiatives and those will enhance new product innovations.

Based on the foregoing arguments this study expects the presence of a Chief Information Officer (CIO) and the Chief Technology Officer (CTO) in the top management team (TMT) to be positively moderating the relationship between absorptive capacity and post-M&A innovation performance. So, following this reasoning hypothesis 2 is as follows:

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H2: Presence of a CIO/CTO in the top management team of the acquirer will positively moderate the relationship between absorptive capacity and post-M&A innovation

performance.

Figure 1. Conceptual framework

4. Methods

This quantitative empirical research studies acquiring firms in the high-tech sector in the United States between 1996 and 2001 for several reasons. Firstly, this sample is more recent than most of the prior affiliated research (Ahuja and Katila, 2001; Valentini, 2012; Makri et al., 2010). Investigating the most recent obtainable sample of M&As will most accurately reflect the current state of the effect of absorptive capacity on post-M&A innovation performance. Secondly, the retrieved data was extracted from the NBER patent data project that contains data for US patents of the years 1976-2006. Since this database had incomplete data for the more recent years and considering the fact this study had to take lagging effects into account the chosen timeframe was the most obtainable one. Third, the high-tech sector has unique features in terms of environmental dynamism that have significant influence on acquisitions and innovation activities. The speed of (disruptive) innovations in this particular sector often motivates firms to extend their resources and capabilities through mergers and acquisitions (Hagedoorn, 2002; Makri et al. 2010). Therefore, research and outcomes from other sectors cannot be generalized to the high-tech sector due to its unique characteristics.

CIO/CTO presence Post-M&A innovation performance Absorptive capacity H1 H2

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Additionally, in high-tech sectors patents will give a better representation of innovation performance. It is well known that especially in these industries, patents play a decisive role in indicating important aspects of innovation performance (Hagedoorn and Cloodt, 2003).

4.1 Sample

The final sample is composed of all M&A deals reported in the Thomson ONE database such that: (a) they were executed between 1996 and 2001; (b) the deals smaller than $10 million and larger than $500 million are excluded. Firms tend to adopt a hands-off approach with smaller acquisitions because their impact is negligible and acquisitions greater than $500 million are mostly driven by market power or economies of scale instead of knowledge exchange; (c) the financial data of the firm can be obtained via compustat; (d) both firms were high-tech - US based firms; (e) percentage of shares owned after the acquisition by the acquirer was at least 51%; (f) all firms were public firms.

To obtain exclusively firms from high-tech industries this research follows Cloodt et al. (2006) where the SIC codes are used that relate to Aerospace and defense (SIC-codes 372 and 376), computers and office machinery (SIC-code 357), pharmaceuticals (SIC-code 283), and electronics and communications (SIC-code 36). Additionally, in order to ascertain all acquisitions were technological acquisitions this study follows Ahuja and Katila (2001), where they state that when the acquired firm obtains at least one patent in the 5 years prior to being acquired the acquisition can then be defined as a technological acquisition.

The National bureau of Economic Research (NBER) was consulted to extract company patent data. This database has been used extensively in economic research and comprises granted United States Patent and Trademark Office (USPTO) patent data. Matching the correct patent data containing all requirements from the NBER data file to the constructed M&A file companies combined with COMPUSTAT data was a laborious project. The CUSIP

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data from the M&A file was used to match with the PDPCO data in the PDPCO to CUSIP mapping file from the updated NBER file. By using the PDPASS (or Unique Assignee Number) file one can find what firm owns which patents, and when those patents were issued. Then, by analyzing and processing the years in which the patents were issued the number of patents granted 5 years prior and 3 years after each acquisition can be found and merged back to the M&A file in order to compare the data more efficiently. Also, the sample excluded firms who were involved in any other M&A deals during the timeframe of 3 years after the M&A as this could have undesirable influence on the outcomes.

For the 106 firms remaining their annual reports, LinkedIn, Crunchbase, and Bloomberg were used to extract information whether firms had a CIO or CTO in the executive team at the time of the acquisition. Finally, in order to obtain additional financial figures for the control variables, and net sales and R&D expenses to calculate R&D intensity, COMPUSTAT was consulted. Additional missing data was supplemented by online research and annual reports.

4.2 Independent variable

As a proxy for Absorptive capacity, research and development (R&D) intensity of the acquiring firm will be used. This will be calculated by dividing the R&D expenditures by the net sales from the year prior to the acquisition took place. Past research has argued that a firm’s R&D efforts are significant in the absorptive capacity accumulation (Tsai, 2008). Since the article of Cohen and Levinthal (1990) the proxy R&D intensity for absorptive capacity has been widely applied throughout the literature on innovation. They suggested that the ability to exploit external knowledge is often a by-product of R&D investment. Firms with high levels of absorptive capacity invest more in their own R&D and are able to produce more innovations. Additionally, since R&D intensity is a percentage of the net sales it will automatically control for firm size and for a potential increase in firm size after the

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acquisition. As explained above the R&D expenditures and the net sales data will be collected from the COMPUSTAT database.

Equation 1:

R&D intensity = R&D expenditures / Net sales

4.3 Dependent variable

The dependent variable of this research is the post innovation performance of the acquiring firm following the M&A deal. According to former studies innovation performance is directly related to the number of patents granted to the acquiring firm (Jo, Park, and Kang, 2016; Han et al. 2016; Cloodt et al. 2006). Furthermore, patents are one of the most widely used proxies of innovation performance in the field of innovation and strategy according to Hall, Jaffe, and Trajtenberg (2005). So, the independent variable in this research is measured by the difference in number of patents granted to the acquiring firm. However, for patents a certain degree of time lag has to be taken into account as the absorption of knowledge until the actual patent application takes some time (Rothaermel and Hess, 2007). Therefore, this study will follow the study of Jo et al. (2016) and Ahuja and Katila (2001) where a period of 3 years after the acquisition is used to count patent output in order to take lagging effects into account. Mergers and acquisitions will be measured by M&A activity in the US high-tech sector from 1996 until 2001. Data will be deducted from ThomsonOne – SDC (Platinum) database. ThomsonOne is one of the most comprehensive databases on acquisitions and has been used repeatedly in previous studies (Makri et al. 2010; Valentini 2012). This study will similarly to Finkelstein and Haleblian (2002) and Harrison, Hitt, and Hoskissen (1991) exclude deals smaller than $10 million and larger than $500 million. As explained before,

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firms tend to adopt a hands-off approach with smaller acquisitions because their impact is negligible and acquisitions greater than $500 million are mostly driven by market power or economies of scale instead of knowledge exchange.

4.4 Moderator

One part of this study is to investigate the moderating effect of the presence CIO/CTO in the management team. Information about top management teams compositions and job titles has been accurately found via a search on their particular website and Bloomberg company overviews. To measure for this effect firms have been classified into two separate groups by creating a dummy variable: one group where a CIO/CTO was present and one group where there was no CIO present in the management team where:

0 = CIO/CTO absence 1 = CIO/CTO presence

For this study, both CIOs and CTOs can be considered as equivalent as they both have similar impact on the absorptive capacity and innovation performance relationship of a firm. There are several arguments that motivate this standpoint. Firstly, The roles of a CIO and a CTO are greatly overlapping and can therefore be considered as having the same impact on absorptive capacity and innovation relationship. Beatty et al. (2005) state that the two roles are interrelating due to the fast growth of numerous responsibilities the CIO role had to cope with. Consequently, the CTO role arose, various companies implemented this position to take over some responsibilities of the CIO. Moreover, they are jointly responsible for maintaining, enhancing, and communicating firm’s informational assets and divide responsibilities between themselves (Ashmore, 1989). Additionally, besides CIOs having noticeable impact on the integration of new knowledge/technologies (Saldanha and Krishnan, 2011), a CTO is

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also mentioned by various authors to be playing a critical role in this process (Medcof, 2008; Adler and Ferdows, 1990; Medcof and Lee, 2017). Second, CTOs are said to be directly affecting decisions of the CIO since its role is to be in most companies the “lieutenant” of the CIO (Beatty et al., 2005). Also, Ashmore (1989) mentions that the CIO and CTO complement each other’s knowledge and insights. Third, firms tend to use the terms CIO and CTO interchangeably and therefore both job titles could entail the same job and responsibilities (Grover et al., 1993). Smith (2003) studied practitioner oriented publications and concluded that CTO roles vary from firm to firm and within firms over time and could therefore easily overlap with CIO roles. Also, Smith (2003) states that many organizations have difficulties in separating CIO responsibilities from CTO responsibilities.

4.5 Control variables

Several control variables are used to help control for other explanations of the outcomes. Because not all R&D investments in the observation period can be directly linked to M&A’s, following previous studies, this research will follow some prior conducted studies by controlling for other factors influencing post-M&A innovation performance (Ahuja and Katila, 2001; Kang et al., 2015; Makri et al., 2010).

First of all, like many other innovation studies firm size will be controlled for, this has an important effect on the innovativeness of firms (Kang et al., 2015). Firm size will be calculated by measuring the number of employees (Ahuja and Katila, 2001). A natural log will be used for this control variable to create a more symmetric distribution:

LN(number of employees)

Additionally, firm age will be controlled as this could impact the innovation performance of a firm. According to Hannan and Freeman (1984) firm age can influence the ability to innovate over time due to firm inertia. To control for this factor this study will incorporate a

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natural log of the amount of years since the acquirer firm was founded, also to arrive at a more symmetric distribution:

LN(firm age)

Lastly, industry relatedness was also used as a control variable in this study. Relatedness between industries can be measured by comparing the four-digit Standard Industrial Classification (SIC) codes of the acquirer and the target. When all four SIC code digits match between the two firms it means that they are active in the same industry. Similarly to Villalonga & McGahan (2005) this study applies a value of 1 when al four digits match, a score of 0.5 when three digits are identical, 0.33 when only two digits match, and 0.25 when just one number matches.

4.6 Statistical analysis

The dependent variable post-M&A innovation performance is measured through a change of numbers of patents issued by the acquiring firm. Therefore, applying an ordinary least squared (OLS) regression model would be most appropriate (Makri et al., 2010 and Fosfuri, 2006). In the case of Ahuja and Katila (2001), Cloodt et al. (2006) and Jo et al. (2016) a negative binominal was a more suitable option since they were performing an analysis on panel data combined with patents as count variables. The data analyses have been executed in the statistical software program SPSS. The following model has been used to estimate the

SIC digits overlap Score

4 1

3 .5

2 .33

1 .25

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effect of absorptive capacity on firm innovation performance where the interaction effect of a CIO presence is taken into account:

Equation 2:

Δ M&A patent output.(∑t+3) = c + b1*Firm age+ b2*Firm size+ b3*Ind. Rel.+ b4*Abs. cap. + b5*cio pr. + b₆*cio pr.*abs. cap

5. Results

In the following section the outcomes of this research are reported. Firstly, the descriptive statistics table will be presented and discussed. Thereafter, a summary and table of the results of the multiple regression models will be provided.

5.1 Descriptive statistics

In table 1 the amount of N observations is 106. This number was slightly higher before removing the outliers that negatively affected the model results. Also, some values for R&D intensities represented a value higher than 100%, those improbable observations were excluded from the sample as well. Furthermore, firms that had no information about their TMT composition at the time of the acquisition were excluded too. The included firms of the sample have an average absorptive capacity of 19.64%. This is the average proportion of the total sales being spent on R&D. Additionally, from table 1 can be derived that on average 62% of the firms in the sample had a CIO/CTO in their TMT. Furthermore, the industry relatedness measure was based on each firm its SIC code and based on that it was found that on average the acquirer and target firm’s industries were for 55 percent related.

This study tested the classical assumptions of the OLS regression to ensure the best possible estimates and highest efficiency of the model. When analysing the correlation table (Table 1) one case of potential multicollinearity was uncovered. Firm size is highly correlated

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to the independent variable innovation performance with a ratio of 0.64**, which is higher than the 0.60 benchmark for multicollinearity. Additionally, a Durbin Watson test was performed. To check for autocorrelation in the model (also called serial correlation) this test can be performed and will give a value between 0 and 4. The overall Durbin Watson statistic of the model was 1.59, which meets the widely accepted boundary value of 1.5. Therefore, we can assume that there is no first order linear auto-correlation in our multiple linear regression data. Additionally, the variance inflation factor (VIF) can be assessed to check for multicollinearity in the model. When checking the VIF in table 2, we can assume that there is no sign of multicollinearity since all VIF factors were below 4 and thus significantly lower than the benchmark of 10 (Hair, Anderson, Tatham & Black, 1995). To test for heteroskedasticity in the model a Cook’s distance test was executed. A Cook’s distance can be used in a regression analysis to find outliers in a set of predictor variables. When this value exceeds 0.5 or is significantly deviating from the other observations one can assume that heteroskedasticity is present (Cook and Weisberg, 1983). In the sample all values remained under 0.5 and also none of the observations were extremely deviating from the others, therefore one can assume that there was no sign of heteroskedasticity in the model.

When considering the correlations in Table 1 this study produces several significant correlations between variables. Between CIO/CTO presence and the independent variable innovation performance a significant correlation can be observed (0.5**). Also, the independent variable shows a strong correlation to firm size (0.64**). Additionally, firm size correlates negatively with absorptive capacity (-0.48**), and positively with CIO/CTO presence (0.20*) and firm age (0.48*). Lastly, a negative correlation between firm age and absorptive capacity is observed (-0.52**).

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5.2 Regression analysis

Table 2 exhibits the outcomes of the multiple regression analysis that was conducted. The dependent variable of the multiple regression analysis is post-M&A innovation performance. There are in total three models depicted in table 2. Model 1 contains the regression with the control variables, which is considered as the base model. Thereafter, the CIO/CTO presence and the independent variable absorptive capacity are added in the model 2 and this displays the main relation of the analysis. In Model 3 the interaction effect of CIO/CTO presence on the relation between absorptive capacity and innovation performance is included.

When looking at the R² of the different models there is an increase observable. In model 1 that just contains the control variables a R² of 0.5 can be observed. Model 2 and model 3 both show a R² of 0.69. This means that 69 percent of the variance in the dependent variable is explained by the predictor variables.

In table 2, model 2 depicts the main relationship of this study where the independent variable absorptive capacity shows to be significantly positively related to post-M&A innovation performance with a significance of p < 0.001 and a beta of β = 0.338. This implies that the innovation performance of a firm after M&As increases when the absorptive capacity of the same acquiring firm is higher. Consequently, hypothesis 1 is accepted.

Means S.D. 1 2 3 4 5 6 1 Innovation Performance 699.99 870.20 1.00 2 Absorptive Capacity 19.64% 14.55% .05 1.00 3 CIO/CTO Presence .62 .49 .50** .11 1.00 4 Firm Age 3.55 .23 .05 -.52** -.05 1.00 5 Firm Size 7.78 1.78 .64** -.48** .20* .48** 1.00 6 Industry Relatedness .55 .37 -.11 .10 .15 .04 -.16 1.00 Number of observations (N) = 106

Table 1: Means, Standard deviations, and correlations

** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

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Besides this primary relationship this study aims to discover the substantial effects on this relation by having a CIO/CTO in the TMT of the acquiring firm. In model 2 the direct effect of CIO presence on innovation performance is depicted where a positive significant relation can be noted (p < 0.001; β = 0.302). Even though CIO/CTO presence has a direct positive relation to the dependent variable Model 3 depicts that no significant interaction effect takes place of the CIO presence on the relation between absorptive capacity and innovation performance. Results in model 3 depict an insignificant (p = 0.274) interaction with a small negative coefficient (β = 0.123). Therefore we can reject hypothesis 2.

Since this study follows the Aiken and West (1991) approach, the product term should be significant in the regression equation in order for the interaction to be interpretable. Therefore, creating a visualized plot for the interaction is not desired.

Model Standardized _Coefficients t Sig.

B Std. Error Beta Tolerance VIF R²

1 (Constant) 2148748 982569 2187 .031 .50 Firm Age -1292569 310221 -.339 -4167 .000 .754 1326 Firm Size 396888 40204 .813 9872 .000 .735 1360 Industry Relatedness 91544 171765 .039 .533 .595 .956 1046 2 (Constant) -1129221 943441 -1197 .234 .69 Firm Age -530633 271408 -.139 -1955 .053 .634 1578 Firm Size 392149 35769 .804 10964 .000 .597 1674 industry Relatedness -117893 141169 -.050 -.835 .406 .910 1099 CIO/CTO presence 537442 108923 .302 4934 .000 .857 1167 Absorptive Capacity 20224 4251 .338 4758 .000 .636 1573 3 (Constant) -1055938 944787 -1118 .266 .69 Firm Age -577887 274501 -.152 -2105 .038 .618 1617 Firm Size 397894 36110 .815 11019 .000 .585 1710 Industry Relatedness -121715 141061 -.051 -.863 .390 .910 1099 CIO/CTO presence 684934 172698 .385 3966 .000 .340 2939 Absorptive Capacity 23350 5110 .390 4569 .000 .439 2279 Abs. cap. X CIO/CTO presence -7788 7081 -.123 -1100 .274 .256 3912

Unstandardized

Coefficients Collinearity Statistics

Dependent Variable: Post M&A innovation performance

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6. Discussion

This last section’s aim is to explain the more general implications of the study. The section begins with an overview and the interpretation of the main results. Then, the theoretical and practical contributions are provided, followed by the limitations and suggestions for future research.

6.1 Major findings

The strategic use of M&As to obtain new external knowledge and capabilities in order to grow a firm’s business and achieve a competitive advantage has continued to increase over recent decades (Cloodt et al., 2006; Jo et al., 2016; Hagedoorn and Duysters, 2002). Especially for firms in the high-tech sector, this strategy seems to be more relevant to the innovation process since the objective is to gain complementary resources and exploit synergies between the acquirer and target firm (Ahuja and Katila, 2001). Even though M&As gained in popularity, their outcomes reveal mixed results (Rossi, Tarba, and Raviv, 2013). This study argues that the outcomes of M&As in terms of innovation performance are dependent upon the firm’s absorptive capacity. Although the absorptive capacity concept has been highly researched, its impact on M&As remains relatively unexplored (Junni and Sarala, 2013). This is notable because many authors argue that absorptive capacity plays a dominant role in knowledge and innovation processes (Ince et al., 2016; Lin et al., 2012). Therefore, the main relationship in this research was created to illuminate the impact and role of absorptive capacity on post-M&A innovation performance of high-tech firms. This research found consistent results with the studies claiming that a higher absorptive capacity leads to a higher innovation performance (Liao et al., 2010; Jo et al., 2016; Ahuja and Katila, 2001; Tseng et al., 2011; Ince et al., 2016). More specifically, the patent output of the acquiring firm after the