Abstract

http://ssrn.com/abstract=1815207
 
 

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Signaling to Partially Informed Investors in the Newsvendor Model


William Schmidt


The Johnson School, Cornell University

Vishal Gaur


Cornell University - Samuel Curtis Johnson Graduate School of Management

Richard K. Lai


The Wharton School, Univ. of Pennsylvania

Ananth Raman


Harvard University - Technology & Operations Management Unit

February 6, 2012


Abstract:     
We investigate a phenomenon in which firms may attempt to influence their market valuation by choosing an inventory stocking quantity which does not optimize expected profits. We employ the newsvendor model within a signaling game to examine a relatively common scenario in which the firm's equity holder has incomplete information concerning the demand for the firm's product. We apply a perfect Bayesian equilibrium solution and identify ranges of model parameters where the firm's stocking quantity decision does not maximize expected profits. This includes instances in which a firm facing high demand chooses a lower stocking quantity than that which would optimize expected profits and a firm facing low demand chooses a higher stocking quantity than that which would optimize expected profits. This result contrasts with prior research, which has shown that when equity holders have incomplete information about the quality of the firm's opportunities, high quality firms will consistently overinvest and low quality firms will invest to optimize expected profits. We show an extreme example of this behavior in which a high demand firm chooses that stocking quantity which would have been optimal under complete information for a low demand firm.

Number of Pages in PDF File: 41

Keywords: Capacity investment, inventory, signaling game, newsvendor


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Date posted: April 20, 2011 ; Last revised: March 1, 2012

Suggested Citation

Schmidt, William and Gaur, Vishal and Lai, Richard K. and Raman, Ananth, Signaling to Partially Informed Investors in the Newsvendor Model (February 6, 2012). Available at SSRN: http://ssrn.com/abstract=1815207 or http://dx.doi.org/10.2139/ssrn.1815207

Contact Information

William Schmidt (Contact Author)
The Johnson School, Cornell University ( email )
Ithaca, NY 14853
United States
Vishal Gaur
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Richard K. Lai
The Wharton School, Univ. of Pennsylvania ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215 898 1630 (Phone)
Ananth Raman
Harvard University - Technology & Operations Management Unit ( email )
Boston, MA 02163
United States
617-495-6937 (Phone)
617-496-4059 (Fax)
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