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Pooling, Separating, and Semiseparating Equilibria in Financial Markets: Some Experimental Evidence

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

Abstract

This study investigates experimental financial markets in which firms possess more information than do potential investors. Firms were given opportunities to undertake positive net present value projects which they could either forgo or finance by selling equity. Auctions were conducted among the investors for the right to finance the projects. When the theoretical equilibrium was unique, theory predicted well. When theory permitted pooling, separation, and semiseparation, only the more efficient pooling equilibrium was observed. The domination of the pooling equilibrium was robust to different experimental experiences by participants. When available, signals were used by good firms to distinguish themselves from bad. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Cadsby, Charles B & Frank, Murray & Maksimovic, Vojislav, 1990. "Pooling, Separating, and Semiseparating Equilibria in Financial Markets: Some Experimental Evidence," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 315-342.
  • Handle: RePEc:oup:rfinst:v:3:y:1990:i:3:p:315-42
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    Cited by:

    1. Thomas H. Noe & Michael J. Rebello & Thomas A. Rietz, 2012. "Product Market Efficiency: The Bright Side of Myopic, Uninformed, and Passive External Finance," Management Science, INFORMS, vol. 58(11), pages 2019-2036, November.
    2. Gautam Goswami & Martin Grace & Michael Rebello, 2008. "Experimental evidence on coverage choices and contract prices in the market for corporate insurance," Experimental Economics, Springer;Economic Science Association, vol. 11(1), pages 67-95, March.
    3. Kübler, D. & Müller, W. & Normann, H.T., 2008. "Job-market signalling and screening : An experimental study," Other publications TiSEM e60074dd-75cb-47df-965c-a, Tilburg University, School of Economics and Management.
    4. Lisa Posey & Abdullah Yavas, 2007. "Screening equilibria in experimental markets," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(2), pages 147-167, December.
    5. Potters, Jan & van Winden, Frans, 1996. "Comparative Statics of a Signaling Game: An Experimental Study," International Journal of Game Theory, Springer;Game Theory Society, vol. 25(3), pages 329-353.
    6. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    7. 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.
    8. Kübler, Dorothea & Müller, Wieland & Normann, Hans-Theo, 2008. "Job-market signaling and screening: An experimental comparison," Games and Economic Behavior, Elsevier, vol. 64(1), pages 219-236, September.
    9. Siegenthaler, Simon, 2017. "Meet the lemons: An experiment on how cheap-talk overcomes adverse selection in decentralized markets," Games and Economic Behavior, Elsevier, vol. 102(C), pages 147-161.
    10. Amrish Patel & Edward Cartwright, 2009. "Social Norms and Naive Beliefs," Studies in Economics 0906, School of Economics, University of Kent.

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