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Costless Signalling in Financial Markets

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  • Franke, Gunter

Abstract

A costless, fully-revealing, signaling equilibrium is derived from two easily understandable conditions. The outsider-rationality condition states that the outsiders relate the price that they offer to pay for a security inversely to the supply of this security that they interpret as a quality signal. The no-arbitrage condition requires that the marginal exchange rate for two securities be the same in both primary and secondary markets. The se conditions restrict the firm's financing policy and have strong im plications for the valuation of securities and of the total firm. A c ostless signaling equilibrium is obtained. Copyright 1987 by American Finance Association.

Suggested Citation

  • Franke, Gunter, 1987. "Costless Signalling in Financial Markets," Journal of Finance, American Finance Association, vol. 42(4), pages 809-822, September.
    • Handle: RePEc:bla:jfinan:v:42:y:1987:i:4:p:809-22
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    Cited by:

    1. Ang, James S. & Kraizberg, Elli, 2004. "An analysis of a strategy for management to separate and reward supportive shareholders," Journal of Corporate Finance, Elsevier, vol. 10(4), pages 639-658, September.
    2. Maggie Rong Hu & Xiaoyang Li & Yang Shi, 2019. "Adverse Selection and Credit Certificates: Evidence from a P2P Platform," Working Papers id:13038, eSocialSciences.
    3. Hu, Maggie Rong & Li, Xiaoyang & Shi, Yang, 2019. "Adverse Selection and Credit Certificates: Evidence from a P2P Platform," ADBI Working Papers 942, Asian Development Bank Institute.

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