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Non-hierarchical signalling: two-stage financing game

Author

Listed:
  • Anton Miglo

    (University of Guelph, Department of Economics.)

  • Nikolay Zenkevich

    (Saint-Petersburg State University, Faculty of Applied Mathematics and Control Processes.)

Abstract

The literature analyzing games where some players have private information about their "types" is usually based on the duality of "good" and "bad" types (GB approach), where "good" type denotes the type with better quality. In contrast, this paper analyzes a signalling game without types hierarchy. Different types have the same average qualities but different profiles of quality over time which are their private information. We apply this idea to analyze a financing-investment game where firms' insiders have private information about the firm's profit profile over time. Some firms are "performance-improving" with increasing profit profiles; others are "stagnant" with declining profit profiles. We show that equilibrium is either pooling with debt when the economy is stagnating, or separating when the economy is growing (performance-improving firms issue debt while stagnant firms issue shares). This provides new theoretical results that cannot be explained by the standard GB models and which are consistent with some financial market phenomena.

Suggested Citation

  • Anton Miglo & Nikolay Zenkevich, 2006. "Non-hierarchical signalling: two-stage financing game," Working Papers 0603, University of Guelph, Department of Economics and Finance.
    • Handle: RePEc:gue:guelph:2006-3
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    References listed on IDEAS

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    Cited by:

    1. Anton Miglo, 2009. "Earnings‐Based Compensation Contracts Under Asymmetric Information," Manchester School, University of Manchester, vol. 77(2), pages 225-243, March.
    2. Miglo, Anton, 2007. "Debt-equity choice as a signal of earnings profile over time," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(1), pages 69-93, March.
    3. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics and Finance.
    4. Miglo, Anton, 2017. "Timing of earnings and capital structure," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 1-15.
    5. Anton Miglo, 2006. "Optimal compensation contracts under asymmetric information concerning expected earnings," Working Papers 0613, University of Guelph, Department of Economics and Finance.

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    More about this item

    Keywords

    Asymmetric information; Non-hierarchical signalling; Financing; Debt-equity choice; Equilibrium refinements; Intuitive criterion; Mispricing.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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