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I nvestment in a N ew T echnology as a S ignal of F irm V alue U nder R egulatory O pportunism
Author(s) -
Spiegel Yossef,
Wilkie Simon
Publication year - 1996
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1996.00251.x
Subject(s) - pooling , opportunism , microeconomics , investment (military) , economics , uncorrelated , valuation (finance) , sunk costs , market value , private information retrieval , value (mathematics) , monetary economics , industrial organization , business , finance , market economy , statistics , mathematics , politics , political science , law , artificial intelligence , machine learning , computer science
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.