Financing and Signaling Decisions under Asymmetric Information

Abstract

This paper presents an experimental investigation of a financing-investment environment under asymmetric information. It examines the underpricing-signaling hypothesis. Importantly, the paper tests and compares this hypothesis 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). The results suggest that underpricing can serve as a credible signal of quality under certain parameters. The underpricing is lower under CBO than under TLO institution. The use of experimental methods contributes an empirical perspective on the role of underpricing and the choice of institution in corporate financial markets.

Keywords: Underpricing, Signaling, Financing, Asymmetric Information, Experiment