Investment in a new technology as a signal of firm value under regulatory opportunism

Yossef Spiegel, Simon Wilkie

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)251-276
Number of pages26
JournalJournal of Economics and Management Strategy
Volume5
Issue number2
DOIs
Publication statusPublished - Jun 1996
Externally publishedYes

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