Absent the Availability of a Specific Market Metric, Signaling Does not Facilitate Game Theoretic Equilibriums that Are 'globally Fully Revealing'

Abstract

Suppose a public equity market already consists of, at the very least, two stocks and that IPO quality is maintained ad infinitum. Suppose all new issues that arrive within the primary market signal private information in relation to either of incumbent listed firms or other intending listing firms. The formal theory that is developed in this study shows signaling facilitates `globally fully revealing' price equilibriums `if and only if' the public equity market incorporates a market metric whose output is the cumulative quality of all IPOs which already have arrived in the market. For concreteness, conditional on the conditioning of the valuations of new issues on the output of the market metric, every new issue is parameterized by exactly three feasible fair valuations. In absence, however, of the market metric, there does not exist any binding restriction on the aggregate number of feasible valuations. Pricing that solely is conditioned on signaling equilibriums is, as such only `locally fully revealing', that is, facilitates solely a contingent contract. Imposing Backward Induction Compatibility on signalers, always signaling is credible and there is arrival at equilibrium, namely ab initio and absent the emergence of any unforeseen perturbations, the irrelevance of signaling to future revisions to asset prices. If signaling is to contribute to the robustness of price equilibriums, there is arrival at the necessity of the market metric.

Keywords: Information Revelation, Market Mechanisms, Asset Quality, Asset Risk, Asymmetric Information, Price Discovery

JEL Classification: G12, D81, D82, D53