MOTIVES FOR FORMING RESEARCH-AND-DEVELOPMENT FINANCING ORGANIZATIONS

We study the decision to fund R&D through a separate financing organiz ation (an 'RDFO') that takes the form of either a limited partnership or a corporation. The RDFO offers tax and financial reporting benefits . As a form of external funding, it also creates moral hazard and adve rse selection problems (information costs). Using convertible debt as a comparative form of external funding, we find that debt-related (but not equity-related) financial reporting benefits affect the decision to form RDFOs, the evidence is mixed on whether taxes influence the fo rmation decision, and the information costs of RDFOs restrict their us e.