TY - JOUR
T1 - Investment in a new technology as a signal of firm value under regulatory opportunism
AU - Spiegel, Yossef
AU - Wilkie, Simon
PY - 1996
Y1 - 1996
N2 - We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.
AB - We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.
UR - http://www.scopus.com/inward/record.url?scp=0030520485&partnerID=8YFLogxK
U2 - 10.1111/j.1430-9134.1996.00251.x
DO - 10.1111/j.1430-9134.1996.00251.x
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AN - SCOPUS:0030520485
SN - 1058-6407
VL - 5
SP - 251
EP - 276
JO - Journal of Economics and Management Strategy
JF - Journal of Economics and Management Strategy
IS - 2
ER -