Financing R&D in mature companies: An empirical analysis

We study financing patterns of publicly traded R&D-intensive manufacturing firms in Israel. We further characterize R&D-intensive firms by size, physical capital intensity, and whether they issued stocks in the United States, asking whether these features are associated with particular financing patterns. To address these issues, we present, for the first time, adjusted flow of funds charts that treat R&D expenses as a capital outlay (rather than an operating cost that reduces profits, as standard accounting principles prescribe). We also address the question of how R&D inputs should be measured - using R&D expenses or R&D personnel. We construct both expenditure- and personnel-based R&D measures for each firm in our sample, and investigate to what extent these measures are mutually consistent.     

CORPORATE GOVERNANCE IN AN EMERGING MARKET: THE CASE OF ISRAEL

Despite significant capital-market reforms in the mid-1980s, the Israeli government and banks continue to play an unusually dominant role in Israeli financial markets. Israeli banks operate as merchant banks and, through pyramid structures of ownership, control large segments of manufacturing, construction, insurance, and services. In addition, the banks dominate all facets of the capital market, including underwriting, brokerage, investment advice, and the management of mutual and provident funds.
Because of this dominance by the banks, several important mechanisms of corporate governance are missing. There is no effective market for corporate control; institutional investors have little incentive to monitor corporate managers; and those managers in turn have little incentive to improve firm performance and increase shareholder value.
To be sure, there has been an impressive wave of IPOs on the Tel Aviv Stock Exchange (TASE) in the 1990s. But those firms' stocks have substantially underperformed the market since going public, and many "higher-quality" Israeli firms have chosen in recent years to list their securities on the NASDAQ and not at home. The main reason the most promising Israeli firms go public in the U.S. is because that is where U.S. and other foreign investors want to buy them; such investors want the assurances that come with the U.S. corporate governance system.     

Information revelation in a market with pairwise meetings: the one sided information case

Summary We study a market with pairwise meetings of agents and with a one sided information asymmetry regarding the state of the world, which may be low or high. We characterize the set of equilibria of the model, and study its behavior as the market becomes approximately frictionless. For any one sided information economy there is an equilibrium where trade occurs at the right price (an ex-post individually rational price). Moreover, there is an open set of economies where in all the equilibria trade occurs at the right price.We thank Douglas Gale, Jerry Green, Sergiu Hart, Andreu Mas-Colell, Eric Maskin, Thomas Sjöström, and Kathy Spier for their comments. We are grateful to a referee for correcting a mistake in an earlier draft and for providing extremely helpful suggestions. The financial support of the Fulbright — MEC program (R. Serrano) and the Sloan Foundation (O. Yosha) is acknowledged.     

Welfare analysis of a market with pairwise meetings and asymmetric information

Summary We study the welfare properties of a market with pairwise meetings and asymmetric information, establishing an equivalence between asymptotically expost individually rational and asymptotically (ex-ante, interim and ex-post) efficient equilibrium sequences.We thank Andreu Mas-Colell, Eric Maskin, and Thomas Sjöström for having raised the question which led to the writing of this paper. We are grateful to Nicholas Yannelis and two anonymous referees for helpful comments.     

Stage Financing and the Role of Convertible Securities

Venture capital financing is characterized by extensive use of convertible securities and stage financing. In a model where a venture capitalist provides staged financing for a project, we illustrate an advantage of convertible debt (or warrants) over a mixture of debt and equity. Essentially, when the venture capitalist retains the option to abandon the project, the entrepreneur has an incentive to engage in window dressing and bias positively the short-term performance of the project, reducing the probability that it will be liquidated. An appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project's equity.     

Industrial Organization of Financial Systems and Strategic Use of Relationship Banking

Using standard Industrial Organization tools, we analyze the relation between competition in arm's length financial markets and the prevalence of close bank-firms ties. We show how the degree of competition between financial intermediaries affects the intensity of relationships between banks and client firms, and explore the idea that investment in bank-firm relationships can be used strategically by incumbent multi-product (universal) banks to limit competition in arm's length markets. The analysis implies that reforms designed to facilitate entry of new intermediaries may actually induce incumbent banks to increase investment in relationship banking, so that regulatory entry barriers are replaced by entry barriers created endogenously, namely, there is ``path dependence' in the market structure of financial systems. This result suggests that increased (potential) competition in the financial services industry will not always destroy bank-firm relationships but, on the contrary, may actually strengthen them.