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Investment in a New Technology as a Signal of Firm Value Under Regulatory Opportunism

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  • Yossef Spiegel
  • Simon Wilkie

Abstract

We examine the question of whether a regulated firm that makes a long‐term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.

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  • Yossef Spiegel & Simon Wilkie, 1996. "Investment in a New Technology as a Signal of Firm Value Under Regulatory Opportunism," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 251-276, June.
    • Handle: RePEc:bla:jemstr:v:5:y:1996:i:2:p:251-276
    DOI: 10.1111/j.1430-9134.1996.00251.x
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    References listed on IDEAS

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    1. Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 655-669.
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    3. Spiegel, Yossef, 1994. "The Capital Structure and Investment of Regulated Firms under Alternative Regulatory Regimes," Journal of Regulatory Economics, Springer, vol. 6(3), pages 297-319, September.
    4. David Besanko & Daniel F. Spulber, 1992. "Sequential-Equilibrium Investment by Regulated Firms," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 153-170, Summer.
    5. B. Douglas Berhheim, 1991. "Tax Policy and the Dividend Puzzle," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 455-476, Winter.
    6. Sappington, David E. M., 1986. "Commitment to regulatory bureaucracy," Information Economics and Policy, Elsevier, vol. 2(4), pages 243-258, December.
    7. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, December.
    8. David J. Salant & Glenn A. Woroch, 1992. "Trigger Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 29-51, Spring.
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    Cited by:

    1. James E. Prieger, 2005. "Endogenous Regulatory Delay and the Timing of Product Innovation," Working Papers 54, University of California, Davis, Department of Economics.
    2. James E. Prieger, 2003. "The Timing of Product Innovation and Regulatory Delay," Working Papers 48, University of California, Davis, Department of Economics.
    3. James E. Prieger, 2005. "Endogenous Regulatory Delay and the Timing of Product Innovation," Working Papers 86, University of California, Davis, Department of Economics.
    4. James Prieger, 2008. "Product innovation, signaling, and endogenous regulatory delay," Journal of Regulatory Economics, Springer, vol. 34(2), pages 95-118, October.
    5. James E. Prieger, 2003. "The Timing of Product Innovation and Regulatory Delay," Working Papers 19, University of California, Davis, Department of Economics.

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