Fakultäat für Wirtschaftswissenschaften und Statistik, Universität Konstanz. Valuable comments by Michael Brennan, Wolfgang Bühler, Robert Geske, Nikolaus Läufer, Marti Subrahmanyam, and an unknown referee are gratefully acknowledged. The usual disclaimer applies.
Costless Signalling in Financial Markets
Article first published online: 30 APR 2012
1987 The American Finance Association
The Journal of Finance
Volume 42, Issue 4, pages 809–822, September 1987
How to Cite
FRANKE, C. (1987), Costless Signalling in Financial Markets. The Journal of Finance, 42: 809–822. doi: 10.1111/j.1540-6261.1987.tb03913.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
A costless, fully revealing signalling equilibrium is derived from two easily understandable conditions. The outsider-rationality condition states that the outsiders relate the price that they offer to pay for a security inversely to the supply of this security, which they interpret as a quality signal. The no-arbitrage condition requires that the marginal exchange rate for two securities be the same in both primary and secondary markets. These conditions restrict the firm's financing policy and have strong implications for the valuation of securities and of the total firm. A costless signalling equilibrium is obtained.