This paper argues that a large technological innovation may lead to a merger wave by inducing entrepreneurs to seek funds from technologically knowledgeable firms -experts. When a large technological innovation occurs, the ability of non-experts (banks) to discriminate between good and bad quality projects is reduced. Experts can continue to charge a low rate of interest for financing because their expertise enables them to identify good quality projects and to avoid unprofitable investments. On the other hand, non-experts now charge a higher rate of interest in order to screen bad projects. More entrepreneurs, therefore, disclose their projects to experts to raise funds from them. Such experts are, however, able to copy the projects and disclosure to them invites the possibility of competition. Thus the entrepreneur and the expert may merge so as to achieve product market collusion. As well as rationalizing mergers, the model can also explain various forms of venture financing by experts such as corporate investors and business angels.
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
253.
Find related papers by JEL classification: G30 - Financial Economics - - Corporate Finance and Governance - - - General G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
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