Intangible Capital,New Tobin Q And Corporate Merger

An increasing volume of literature demonstrates the importance of mergers and acquisitions in reallocating resources across firms and in determining aggregate economic outcomes.Despite recent study using firm level data to document clear empirical patterns on intangible intensity of firm’s capital structure,very few works on merger and acquisition have incorporated the rising component of knowledge and organization capital into existing M&A theory.This paper thus revisits Q-theory of merger with our measured intangible capital stock and contributes to on-going debate on explanatory power of merger theory under the neoclassical framework.Our paper finds that,once intangible capital is included in construction of new Tobin Q,the new Q-theory can account for participation into M&A deals,intensity of external acquisition and post-merger performance.In particular,we find that firms with higher new Tobin Q are more active in merger and acquisition,have higher merger to investment ratio and gain more TFP growth from merger.However,these patterns may not prevail using biased Tobin Q constructed without intangible capital.Thus,our results challenge the convention argument on declining explanatory power of Q-theory to merger activities,and attribute their fallacy to overlooking the increasing important intangible capital.