7. Conclusions
We draw from the property rights theory of the firm and its extension to mergers by Rhodes-Kropf and Robinson (2008) to argue that human capital complementarities can motivate mergers and acquisitions. Developing a measure of the relatedness of firms’ human capital, we test whether the likelihood of merger and the synergy benefits deriving from merger are increasing in the relatedness of merging firms’ human capital. Consistent with our hypotheses, we find strong evidence that the likelihood of merger is increasing in human capital relatedness, and that announcement returns and postmerger operating performance are higher when merging firms have closely related human capital. Our analysis shows that the benefits from combining firms with complementary human capital accrue primarily to diversifying acquisitions. This is consistent with theoretical work by Fulghieri and Sevilir (2011) that shows that a merger between firms operating in similar product markets increases market power but harms incentives to innovate and develop new products. An investigation into the channels through which labor complementarities drive higher postmerger profitability finds that a merger of firms with high human capital relatedness predicts a reduction in postmerger employment and labor costs. Again, these post-merger outcomes largely accrue to diversifying acquisitions where the merging firms have high human capital complementarity.
