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Equilibrium Dominance in Experimental Financial Markets

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Author Info

  • Cadsby, Charles Bram
  • Frank, Murray
  • Maksimovic, Vojislav

Abstract

We examine the predictive power of equilibrium dominance in experimental markets where firms with investment opportunities have an informational advantage over potential investors and are permitted to purchase a money-burning signal. Equilibrium dominance often fails to predict well when a Pareto-superior sequential equilibrium is also available. Instead, equilibrium selection appears to be related to the potential earnings of a more valuable firm that can signal its type successfully by defecting from the sequential equilibrium. Potential investors formulate their bids for firm equity based primarily on expectations formed adaptively in response to signaling choices made by firms. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 11 (1998)
Issue (Month): 1 ()
Pages: 189-232

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Handle: RePEc:oup:rfinst:v:11:y:1998:i:1:p:189-232

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Cited by:
  1. Kübler, D. & Müller, W. & Normann, H.T., 2003. "Job Market Signalling and Screening: An Experimental Comparison," Discussion Paper 2003-124, Tilburg University, Center for Economic Research.
  2. Potters, Jan & Sefton, Martin & Vesterlund, Lise, 2005. "After you--endogenous sequencing in voluntary contribution games," Journal of Public Economics, Elsevier, vol. 89(8), pages 1399-1419, August.
  3. Miglo, Anton & Zenkevich, Nikolay, 2005. "Non-hierarchical signalling: two-stage financing game," MPRA Paper 1264, University Library of Munich, Germany, revised 2006.
  4. Kawagoe, Toshiji & Takizawa, Hirokazu, 2009. "Equilibrium refinement vs. level-k analysis: An experimental study of cheap-talk games with private information," Games and Economic Behavior, Elsevier, vol. 66(1), pages 238-255, May.
  5. Cadsby, Charles Bram & Maynes, Elizabeth, 1999. "Voluntary provision of threshold public goods with continuous contributions: experimental evidence," Journal of Public Economics, Elsevier, vol. 71(1), pages 53-73, January.
  6. Gautam Goswami & Martin Grace & Michael Rebello, 2008. "Experimental evidence on coverage choices and contract prices in the market for corporate insurance," Experimental Economics, Springer, vol. 11(1), pages 67-95, March.
  7. José Luis Lima R. & Javier Nuñez E., 2004. "Experimental Analysis of the Reputational Incentives in a Self Regulated Organization," Econometric Society 2004 Latin American Meetings 194, Econometric Society.

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