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This paper analyzes the individual determinants of acquisition activity and target choices in the pharmaceutical industry over the period 1978-2002. The "Innovation gap" hypothesis states that acquiring firms lack promising drug compounds and acquire firms with more promising drug prospects. A duration model implemented over a panel of more than 400 firms relates the probabilities of being a purchaser or a target to financial, R&D and patent data to investigate this explanation more deeply. Results show that purchasers are firms with a lower Tobin's Q and decreasing sales, which could indicate that acquisitions are used to compensate for low internal growth prospects.
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