Reducing antitrust hurts innovation.

Next, I examine the differential effects of mergers and acquisitions based on the size of acquiring firms. I categorize larger acquiring firms as those with an average market value exceeding the median and smaller acquiring firms as those falling below the median.

Subsequent event studies replicate the analysis from Figure 3, focusing on patents (Figure 5) and R&D spending (Figure 6). The results show that larger acquirers' behavior in terms of patents and R&D spending closely aligns with the baseline specification detailed in Figure 3. Larger acquirers tend to significantly reduce patent filings while simultaneously boosting R&D investments.

Conversely, smaller acquirers increase their R&D spending at a slower rate post-M&A and demonstrate little change in patent filing activity. These observations illuminate divergent strategic priorities between larger and smaller acquirers post-M&A. Larger firms perceive mergers primarily as a means of sourcing patents from smaller entities rather than generating their own (Cunningham, et al., 2021).

In the medium term, this leads to a decline in patent activities as larger firms allocate R&D resources toward advancing acquired molecules through clinical trials. Unlike their larger counterparts, smaller firms maintain a consistent internal development focus both in the pre- and post-period, as their M&A events typically involve similarly-sized target companies. Therefore, smaller firms continue to file patents at a comparable rate while also increasing R&D expenditures to advance new molecules through clinical trails

Subsequently, I analyze the variability in the effects of M&A events on innovation based on the target firm's industry. Pharmaceutical companies contend that the synergies resulting from M&A will catalyze innovation. Therefore, horizontal mergers where there is more direct technological overlap should theoretically yield greater innovative output compared to diagonal or vertical mergers, where such overlap is less pronounced. In the baseline specification, I combine both pharmaceutical and biotech M&A activities involving pharmaceutical acquirers. In subsequent event studies, I disaggregate pharmaceutical and biotechnology targets to differentiate the impacts between horizontal M&A (pharmaceuti-cal firms acquiring pharmaceutical targets) and diagonal/vertical M&A (pharmaceutical firms acquiring biotech targets)

The outcomes of this analysis are detailed in Appendix Section D.5. Overall, the effects on innovation due to consolidation are more pronounced in pharmaceutical-to-pharmaceutical M&A compared to pharmaceutical-to-biotech M&A, corroborating my initial hypothesis.

In a comprehensive review of innovation, I find that, upon a merger or acquisition event initiated by a pharmaceutical company, the number of patents decrease while research and development spending increases. The majority of these effects are focused on larger pharmaceutical company acquirers usurping pharmaceutical targets. Despite these changes in patents and R&D spending, there is no significant change in the development or advancement of prospective molecules. The intuition for this impact is pharmaceutical companies change their innovation strategy post-M&A event. Instead of discovering their own molecules in-house, larger companies supplement innovation by acquiring molecules in development from other, smaller pharmaceutical firms. However, despite increasing spending on research and development post-M&A, there is no change in the progression of getting these new drugs through clinical trials and to consumers. These results raise questions regarding proclamations made by drug companies, who emphasize how consolidation improves pharmaceutical innovation. As more R&D spending occurs with no molecular advancement to show for it, the results also challenge the perception that mergers and acquisitions make firms more efficient.