Strategic Financial Signalling
We Present a Model of an Entry Game in Which Both Financial and Output Markets Are Characterized by the Presence of Asymmetric Information. We Argue That a Firm's Financial Policy May Serve As a Common Signal in Both Markets. a Monopoly Is Threatened by Entry. the Profitability of Entry to the Entrant Critically Depends on the Cost Level of the Incubent. We Suppose That the Entrants Wishes to Enter the Market If and Only If the Incubent Has High Cost. But the Entrant Cannot Observe the Incubent's Cost Level Directly, and Is Therefore Uncertain of Whether the Incubent Is a Low Or High Cost Type. All Firms Have to Finance a Fixed Cost of Production At the Beginning of the Period. a Low Cost Incubent Would Like to Credibly Reveal Its Private Information to Financiers to Obtain Financial Prices That Reflect Its Quality. Simultaneously It Would Like to Signal Its Cost to the Entrant to Deter Its Entry. We Suggest That Financial Markets Structure Acts As a Common Signal in Financial Markets Allow the Low Cost Incubent to Use Its Financial Structure to Signal Its Type and Deter Entry.
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