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Expertise and finance: Mergers motivated by technological change

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  • Masako Ueda

Abstract

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.

Suggested Citation

  • Masako Ueda, 1997. "Expertise and finance: Mergers motivated by technological change," Economics Working Papers 253, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:253
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    References listed on IDEAS

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    Cited by:

    1. Masako Ueda, 2000. "Bank versus venture capital," Economics Working Papers 522, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.

    More about this item

    Keywords

    Expertise; venture financing; merger; technological innovation;

    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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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