Abstract: Innovation and Communication: Signaling with Partial Disclosure

Extract

This paper (1) constructs a signaling model with a weaker existence condition than in most signaling models, (2) demonstrates that, using a popular model of innovation under uncertainty, an equilibrium signaling schedule exists for a broad range of boundary conditions and parameter values. These results are derived in a model of a firm possessing private information about an investment opportunity, where the firm issues new equity to finance the investment. The proprietary information cannot be explicitly disclosed to potential investors without also disclosing it to potential competitors, but if investors are unaware of the firm's prospects, shares will have to be issued at a price less than their “intrinsic” value.