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Financing and signaling decisions under asymmetric information: an experimental study

Angelina Christie (Office of the Comptroller of the Currency, Washington, District of Columbia, USA)
Daniel Houser (Department of Economics, George Mason University, Fairfax, Virginia, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 18 June 2019

Issue publication date: 24 June 2019




The purpose of this paper is to test whether underpricing can serve as a signal of quality in a financing-investment environment and to compare it under the two institutions for financing offers that are commonly observed in corporate financial markets: take-it-or-leave-it offer (TLO) and the competitive bidding offer (CBO).


The research paper uses experimental economics methodology and laboratory experiments to investigate the research question.


The results suggest that underpricing can serve as a signal of quality but not sustainable as a repeat strategy. Over time, the high-quality firms converge to a pooling strategy rather than bearing the cost of signaling. Additionally, underpricing is lower under CBO than under TLO institution due to competitive bidding. Signaling under CBO institution may be less salient due to possible mimicking by the low-quality firms.


This paper presents a first experimental investigation of the underpricing-signaling hypothesis in a financing-investment environment under asymmetric information. The choice of institution in a financing environment produces qualitatively and strategically different behavior among firms and investors.



Christie, A. and Houser, D. (2019), "Financing and signaling decisions under asymmetric information: an experimental study", Review of Behavioral Finance, Vol. 11 No. 2, pp. 102-127.



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