A New Test of Signaling Theory

Finance Letters, Vol. 5, No. 2, pp. 1-5, 2007

5 Pages Posted: 13 Jan 2008  

Charlie X. Cai

University of Liverpool Management School

Darren Duxbury

Newcastle University Business School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Abstract

Signaling theories of the pricing of initial public offerings are based on an equilibrium which separates high from low quality companies. In empirically testing these theories one issue which needs addressing is how to identify high and low quality companies. This paper develops a new test of signaling theory where the success or failure of a company is the ultimate measure of high and low quality. On the basis of data from the Dotcom bubble we find that high quality firms were able to signal quality via retained equity and underpricing, but not via underwriter reputation.

Keywords: Signaling theory, IPO market

JEL Classification: G14

Suggested Citation

Cai, Charlie X. and Duxbury, Darren and Keasey, Kevin, A New Test of Signaling Theory. Finance Letters, Vol. 5, No. 2, pp. 1-5, 2007. Available at SSRN: https://ssrn.com/abstract=1082917

Charlie Xiaowu Cai

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Darren Duxbury (Contact Author)

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom
+44(0)191 208 1517 (Phone)

HOME PAGE: http://www.ncl.ac.uk/nubs/staff/profile/darren.duxbury

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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