Simultaneous Signalling to the Capital and Product Markets
AbstractIn this article we analyze an informed firm's choice of financial structure when the financing contract is observed not only by the capital market but also by a second uninformed party, such as a competing firm. The informed firm's gross profit is endogenous, because the second party's action depends on the transaction it observes between the informed firm and the capital market. The main result is that the reasonable capital-market equilibria maximize the ex ante expectation of the informed firm's endogenous gross profits. In distinct contrast to earlier work, which focuses on separating equilibria, in our model it is often the case that all the reasonable equilibria are pooling.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 19 (1988)
Issue (Month): 2 (Summer)
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Web page: http://www.rje.org
Other versions of this item:
- Gertner, Robert H. & Gibbons, Robert. & Scharfstein, David., 1987. "Simultaneous signaling to the capital and product markets," Working papers 1917-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert Gertner & Robert Gibbons & David Scharfstein, 1987. "Simultaneous Signaling to the Capital and Product Markets," Working papers 449, Massachusetts Institute of Technology (MIT), Department of Economics.
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