Investment in a New Technology as a Signal of Firm Value Under Regulatory Opportunism

Yossef Spiegel and Simon Wilkie

Journal of Economics & Management Strategy, 1996, vol. 5, issue 2, 251-276

Abstract: 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.

Date: 1996
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https://doi.org/10.1111/j.1430-9134.1996.00251.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:5:y:1996:i:2:p:251-276

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