Build or buy? : human capital and corporate diversification

Why do some firms enter a new sector by acquiring an existing company ("buy"), while others do so using their existing resources ("build")? Using a novel dataset constructed by merging French employer payrolls with commercial M&A datasets, we show that firms are more likely to buy when their existing workforce does not include skills needed in the sector of entry. This relationship is more pronounced when labor market frictions make it difficult to hire key workers. Firms that enter by building realize lower entry sales when their existing workforce is not adapted to the sector of entry, especially in the presence of labor market frictions. Our results suggest that firms buy to acquire their target's human capital when adapting their existing workforce is too costly