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Simultaneous Signalling to the Capital and Product Markets

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  • Robert Gertner
  • Robert Gibbons
  • David Scharfstein

Abstract

In 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 Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 2 (Summer)
Pages: 173-190

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Handle: RePEc:rje:randje:v:19:y:1988:i:summer:p:173-190

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Cited by:
  1. David A. Miller, 2005. "Invention under uncertainty and the threat of ex post entry," Industrial Organization 0510001, EconWPA.
  2. Jeremy Bulow & Paul Klemperer, 2007. "When are Auctions Best?," Economics Papers 2007-W03, Economics Group, Nuffield College, University of Oxford.
  3. Perotti, Enrico C & von Thadden, Ernst-Ludwig, 2001. "Outside Finance, Dominant Investors and Strategic Transparency," CEPR Discussion Papers 2733, C.E.P.R. Discussion Papers.
  4. Daughety, Andrew & Reinganum, Jennifer, 1994. "Keeping Society in the Dark: On the Admissibility of Pretrial Negotiations as Evidence in Court," Working Papers 94-06, University of Iowa, Department of Economics.
  5. Javier Campos, 2000. "Responsabilidad limitada, estructura financiera y comportamiento de las empresas españolas," Investigaciones Economicas, Fundación SEPI, vol. 24(3), pages 585-610, September.
  6. Boubaker, Sabri & Mansali, Hatem & Rjiba, Hatem, 2014. "Large controlling shareholders and stock price synchronicity," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 80-96.
  7. Jesús Mario Bilbao & Nieves Jiménez & Jorge Jesús López, 2004. "A note on a value with incomplete communication," Economic Working Papers at Centro de Estudios Andaluces E2004/55, Centro de Estudios Andaluces.
  8. Nancy A. Lutz, 1988. "Warranties as Signals Under Consumer Moral Hazard," Cowles Foundation Discussion Papers 867, Cowles Foundation for Research in Economics, Yale University.
  9. Arturo, Ramirez Verdugo, 2004. "Dividend Signaling and Unions," MPRA Paper 2273, University Library of Munich, Germany, revised 04 Oct 2006.
  10. Manel Antelo, 2004. "Simultaneous signaling and output royalties in licensing contracts," Economic Working Papers at Centro de Estudios Andaluces E2004/53, Centro de Estudios Andaluces.
  11. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2001. "Outside Finance, Dominant Investors and Strategic Transparancy," Tinbergen Institute Discussion Papers 01-019/2, Tinbergen Institute.
  12. Giovanni Cespa, 2003. "A Comparison of Stock Market Mechanism," CSEF Working Papers 94, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  13. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2013. "Product market power, industry structure, and corporate earnings management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3273-3285.
  14. Goltsman, Maria & Pavlov, Gregory, 2011. "How to talk to multiple audiences," Games and Economic Behavior, Elsevier, vol. 72(1), pages 100-122, May.

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