Financing and signaling decisions under asymmetric information: an experimental study
ISSN: 1940-5979
Article publication date: 18 June 2019
Issue publication date: 24 June 2019
Abstract
Purpose
The purpose of this paper is to test whether underpricing can serve as a signal of quality in a financing-investment environment and to compare it under the two institutions for financing offers that are commonly observed in corporate financial markets: take-it-or-leave-it offer (TLO) and the competitive bidding offer (CBO).
Design/methodology/approach
The research paper uses experimental economics methodology and laboratory experiments to investigate the research question.
Findings
The results suggest that underpricing can serve as a signal of quality but not sustainable as a repeat strategy. Over time, the high-quality firms converge to a pooling strategy rather than bearing the cost of signaling. Additionally, underpricing is lower under CBO than under TLO institution due to competitive bidding. Signaling under CBO institution may be less salient due to possible mimicking by the low-quality firms.
Originality/value
This paper presents a first experimental investigation of the underpricing-signaling hypothesis in a financing-investment environment under asymmetric information. The choice of institution in a financing environment produces qualitatively and strategically different behavior among firms and investors.
Keywords
Citation
Christie, A. and Houser, D. (2019), "Financing and signaling decisions under asymmetric information: an experimental study", Review of Behavioral Finance, Vol. 11 No. 2, pp. 102-127. https://doi.org/10.1108/RBF-06-2017-0055
Publisher
:Emerald Publishing Limited
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