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Simultaneous Signalling to the Capital and Product Markets

Robert Gertner, Robert Gibbons and David Scharfstein
The RAND Journal of Economics
Vol. 19, No. 2 (Summer, 1988), pp. 173-190
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555698
Page Count: 18
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Simultaneous Signalling to the Capital and Product Markets
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Abstract

In this article we analyze an informed firm's choice of financial structure when the financing contract is observed not only by the capital market but also by a second uninformed party, such as a competing firm. The informed firm's gross profit is endogenous, because the second party's action depends on the transaction it observes between the informed firm and the capital market. The main result is that the reasonable capital-market equilibria maximize the ex ante expectation of the informed firm's endogenous gross profits. In distinct contrast to earlier work, which focuses on separating equilibria, in our model it is often the case that all the reasonable equilibria are pooling.

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