Financing and Signaling Decisions under Asymmetric Information: An Experimental Study

Christie, A., & Houser, D. (2019). Financing and signaling decisions under asymmetric information: an experimental study. Review of Behavioral Finance,11(2), 102-127.

49 Pages Posted: 31 Jan 2022 Last revised: 10 Feb 2022

See all articles by Angelina Christie

Angelina Christie

Office of the Comptroller of the Currency

Daniel Houser

Interdisciplinary Center for Economic Science

Date Written: March 14, 2018

Abstract

This paper presents a first experimental investigation of the underpricing-signaling hypothesis in a financing-investment environment under asymmetric information. 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 signal of quality but not sustainable as a repeat strategy. Over time, the high-quality firms converge to a pooling strategy rather than bear 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.

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

JEL Classification: C9, G3

Suggested Citation

Christie, Angelina and Houser, Daniel, Financing and Signaling Decisions under Asymmetric Information: An Experimental Study (March 14, 2018). Christie, A., & Houser, D. (2019). Financing and signaling decisions under asymmetric information: an experimental study. Review of Behavioral Finance,11(2), 102-127., Available at SSRN: https://ssrn.com/abstract=4020465

Angelina Christie (Contact Author)

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Daniel Houser

Interdisciplinary Center for Economic Science ( email )

5th Floor, Vernon Smith Hall
George Mason University
Arlington, VA 22201
United States
7039934856 (Phone)

HOME PAGE: http://mason.gmu.edu/~dhouser/

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