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. ...
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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