CENTER FOR LAW AND ECONOMIC STUDIES
Fall 2001
Law and Economic Workshop Series
with
A Colloquium on Theory in Corporate Law and Finance

During the 2001 fall term, Columbia Law School's Workshop on Law and Economics and New York University Law School's Colloquium on Theory in Corporate Law and Finance are meeting jointly. The Workshop/Colloquium will meet approximately every other week on Mondays between 4:00 p.m. and 6:00 p.m. The location will alternate between CU and NYU. Presentations during these Workshop/Colloquium sessions will focus primarily on corporate governance. All are welcome. The following is the fall schedule:

September 10th  Professor Josh Lerner, Harvard Business School Topic: "Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances," co-authored with Hilary Shane & Alexander Tsai

Location: Columbia Law School, Jerome Greene Lounge, 435 West 116th Street

Abstract - While the variability of public equity financing has been long recognized, its impact on firms has attracted little empirical scrutiny. This paper examines one setting where theory suggests that variations in financing conditions should matter, alliances between small R&D firms and major corporations. We first show that in periods characterized by little public market activity, biotechnology firms are more likely to fund R&D through alliances rather than internal funds. We then consider 200 agreements entered into by biotechnology firms between 1980 and 1995. Consistent with theory, agreements signed during periods with little external equity financing are more likely to assign the bulk of the control to the corporate partner, and those agreements that do so are significantly less successful than other alliances. These agreements are also disproportionately likely to be renegotiated if financial market conditions improve.

Topic: "Just How Incomplete are Incomplete Contracts? "/ "Network Effects in the Governance of Biotech Strategic Alliances"

Location: NYU Law School, (Vanderbilt Hall, Rm. 202), 40 Washington Square South

Abstract - We argue that the stock of prior alliances between participants in the biotechnology sector forms a network that serves as a governance mechanism in inter-firm transactions. To test how this network substitutes for other forms of control, we examine how equity participants and pledged funding in strategic alliances vary with two features of the way alliance participants are positioned in the network of past deals: (i) proximity, and (ii) centrality, which measures how deeply a firm is embedded in the network. As centrality and proximity increase, equity participation (measured by size and propensity) diminish, while pledged funding increases. JEL Classification Codes: G30, G34, G39, M13, O39

Topic: "An Analysis of Shareholder Agreements, Joint Venture Contracts, and Venture Capital Contracts," co-authored with Gilles Chemla, Univ. of British Columbia & Michel Habib, London Business School

Location: Columbia Law School, (Jerome Greene Hall, Rm. 101), 435 West 116th Street

Abstract - We provide an explanation for the main financial clauses in standard shareholder agreements, including joint ventures and venture capital contracts. These clauses are put and call options, drag-along and tag-along rights, pre-emption rights, and initial public offering clauses.

We view these clauses as a response to a double moral hazard problem, whereby the value of the joint enterprise depends on non-contractible investments made by both partners, and whereby each partner may engage in a value decreasing transfer. We allow for uncertainty in that there is a probability that a buyer with a higher valuation than the continuation value appears.

Contract clauses i) minimize transfers from the joint enterprise to one or both partners or the trade buyer while saving costs associated with dispute resolution, and ii) elicit efficient levels of investments. (JEL:G34).

Keywords: Shareholder Agreements; Put Options; Call Options; Drag-Along Rights: Tag-Along Rights; Pre-Emption Rights; IPO Clauses.

October 29th  Professor Lee G. Branstetter, Columbia University, Graduate School of Business

Topic: "When Do Research Consortia Work Well and Why? Evidence from Japanese Panel Data," co-authored with Mariko Sakakibara

Location: NYU Law School, (Vanderbilt Hall, Rm. 202), 40 Washington Square South

Abstract - We examine the impact of a large number of Japanese government-sponsored research consortia on the research productivity of participating firms by measuring their patenting in the targeted technologies before, during, and after participation. Consistent with the predictions of the theoretical literature on research consortia, we find consortium outcomes are positively associated with the level of potential R&D spillovers within the consortium and (weakly) negatively associated with the degree of product market competition among consortium members. Furthermore, our evidence suggests that consortia are most effective when they focus on basic research. (JEL O32, O31, L52)

Topic: "The Cost of Inappropriate Governance in R & D Alliances"

Location: Columbia Law School, (Jerome Greene Hall, Rm. 101), 435 West 116th Street

Abstract - Transaction cost economics argues that appropriately aligning transactions with governance leads to more efficient outcomes. While empirical evidence demonstrates that firms choose governance consistent with transaction cost predictions, the performance implications of governance so selected are less well explored. Here, I examine the cost of inappropriate governance in the context of R&D alliances. Two types of inappropriate choice are evaluated: governance that gives rise to excessive contracting hazards or excessive bureaucracy. Using a sample of R&D alliances in the telecom equipment industry, I find that alliance governance selected according to transaction cost arguments improves collaborative benefits substantially over governance not so selected. Interestingly, governance imposing excessive bureaucracy reduces collaborative benefits more than governance imposing excessive contracting hazards does. These results provide empirical evidence of the cost of inappropriate governance and have implications for research on the limits of internal organization and that linking organizational form and innovation.

Topic: "Structure of International Joint Ventures by U.S. Multinational Corporations," co-authored with James Hines, Univ. of Michigan - Ann Arbor, and FJritz Foley, Harvard Univ.

Location: NYU Law School, (Vanderbilt Hall, Rm. 202), 40 Washington Square South

Abstract - This paper examines the determinants of ownership shares on the part of American multinational firms investing abroad, as functions of the characteristics both of parent companies and the countries in which they invest. Despite the hypothesized benefits of partnering with a local party, American multinational firms increasingly organize their foreign business operations as wholly owned ventures rather than joining with foreign partners. To the degree that learning is facilitated through shared ownership, the evidence indicates that this learning centers on an affiliate's orientation toward serving the host country and the local sourcing of inputs. In contrast to these benefits of minority ownership, shared ownership appears to carry significant costs associated with limited flexibility in coordinating integrated production activities across different locations, global transfers of technology, and worldwide tax planning. Parents are more likely to select whole ownership when creating an affiliate that sells more of its output to or buys more inputs from a related party. Affiliates that are whole or majority owned report profitability that is more sensitive to local tax rates. Majority and wholly owned affiliates are also more likely to make a royalty payment to their U.S. parent firm for the transfer of intangible assets than minority owned affiliates. Taken together, this evidence suggests that although shared ownership helps firm better serve local markets, coordination problems call for majority or whole ownership in many circumstances.

Topic: "Globalization and Convergence of Corporate Governance: A Cross-Country Empirical Test," co-authored with Joe Kogan & Krishna Palepu

Location: Columbia Law School, (Jerome Greene Hall, Rm. 101), 435 West 116th Street

Abstract - Some scholars have argued that globalization of capital, product, and labor markets should put pressure on firms to adopt a common set of the most efficient governance practices, while others maintain that path dependence will preclude such convergence. We employ a variety of cross-national data sources on corporate governance, many never before used in the academic literature, to empirically test the convergence hypothesis. At the country level, we check whether pairs of countries which are economically integrated are likely to have similar governance practices. Using firm-level data for 24 developing countries and 13 European countries, we investigate whether firms and industries more exposed to globalization have better governance than their country peers. We find little evidence of a relationship between globalization and governance at the country, industry or firm-levels, and are thereby able to reject the prediction of convergence.

Please direct your questions to
Thelma Twyman 
e. ttwyman@columbia.edu
t. 212.854.3739