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Strategic Financial Signalling

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  • Poitevin, M.

Abstract

We Present a Model of an Entry Game in Which Both Financial and Output Markets Are Characterized by the Presence of Asymmetric Information. We Argue That a Firm's Financial Policy May Serve As a Common Signal in Both Markets. a Monopoly Is Threatened by Entry. the Profitability of Entry to the Entrant Critically Depends on the Cost Level of the Incubent. We Suppose That the Entrants Wishes to Enter the Market If and Only If the Incubent Has High Cost. But the Entrant Cannot Observe the Incubent's Cost Level Directly, and Is Therefore Uncertain of Whether the Incubent Is a Low Or High Cost Type. All Firms Have to Finance a Fixed Cost of Production At the Beginning of the Period. a Low Cost Incubent Would Like to Credibly Reveal Its Private Information to Financiers to Obtain Financial Prices That Reflect Its Quality. Simultaneously It Would Like to Signal Its Cost to the Entrant to Deter Its Entry. We Suggest That Financial Markets Structure Acts As a Common Signal in Financial Markets Allow the Low Cost Incubent to Use Its Financial Structure to Signal Its Type and Deter Entry.

Suggested Citation

  • Poitevin, M., 1987. "Strategic Financial Signalling," Cahiers de recherche 8755, Universite de Montreal, Departement de sciences economiques.
    • Handle: RePEc:mtl:montde:8755
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    Cited by:

    1. Felix Munoz-Garcia & Gulnara Zaynutdinova, 2013. "Capacity Constrained Firms and Expansion Subsidies: Should Governments Avoid Generous Subsidies?," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 563-597, December.
    2. Mai, Nhat Chi, 2016. "The Influence Of Macroeconomic Announcements Into Vietnamese Stock Market Volatility," OSF Preprints ydmhx, Center for Open Science.
    3. Rafik Abdesselam & Sylvie Cieply & Nicolas Le Pape, 2002. "Les facteurs de différentiation des banquiers mutualistes et commerciaux en matière de financement des PME," Revue d'Économie Financière, Programme National Persée, vol. 67(3), pages 121-131.
    4. Lorenzo Esposito, 2014. "Con Annibale alle porte. L'internazionalizzazione del sistema bancario e il caso italiano," Moneta e Credito, Economia civile, vol. 67(266), pages 311-338.
    5. Javier Campos, 2000. "Responsabilidad limitada, estructura financiera y comportamiento de las empresas españolas," Investigaciones Economicas, Fundación SEPI, vol. 24(3), pages 585-610, September.
    6. Leonard J. Mirman & Thomas Jeitschko & Neelam Jain, 2001. "Financial Intermediation and Entry-Deterrence: A survey," Economics Bulletin, AccessEcon, vol. 12(1), pages 1-13.
    7. M. Pilar Socorro, 2004. "Mergers and the limited liability effect," Documentos de trabajo conjunto ULL-ULPGC 2004-11, Facultad de Ciencias Económicas de la ULPGC.
    8. Istaitieh, Abdulaziz & Rodriguez-Fernandez, Jose M., 2006. "Factor-product markets and firm's capital structure: A literature review," Review of Financial Economics, Elsevier, vol. 15(1), pages 49-75.
    9. Abdulaziz Istaitieh & José M. Rodríguez‐Fernández, 2006. "Factor‐product markets and firm's capital structure: A literature review," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 49-75.
    10. Marcel Boyer & Armel Jacques & Michel Moreaux, 2001. "Bankruptcy Cost, Financial Structure and Technological Flexibility Choices," CIRANO Working Papers 2001s-27, CIRANO.

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    Keywords

    Asymmetry ; Information;

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