DP15865 Human Capital Integration in Mergers and Acquisitions

Author(s): Paolo Fulghieri, Merih Sevilir
Publication Date: March 2021
Keyword(s): Human Capital, mergers
JEL(s):
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15865

This paper presents a theory of post-merger human capital integration where successful integration depends on the willingness of employees of the merging firms to collaborate and share knowledge. In our model, employees in the post-merger firm choose between collaboration to create synergies, and competition to extract greater resources from the corporate headquarters. We show that incentives to collaborate are stronger in mergers between firms with greater human capital complementarity. In such mergers the post-merger firm has a greater reliance on employee human capital in internalizing the benefut of collaboration, increasing the likelihood that employees will be retained in the post-merger firm and receive higher wages. Anticipating the importance of their human capital, employees become more willing ex ante to choose collaboration over competition, resulting in a greater likelihood of successful human capital integration. Consistent with recent empirical evidence, our model suggests that mergers between firms with greater human capital complementary lead to better merger performance. In addition, our model generates novel predictions such as post-merger wages increasing, and layoffs decreasing in the level of human capital complementarity between merging firms.