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A two-period model of signaling with ownership retention Courteau, Lucie
Abstract
This dissertation is an extension of Leland and Pyle's (1977) signaling model. It introduces the length of the retention period to which the entrepreneur commits in the prospectus as a signal of firm value, in addition to the retention level. The analysis uses concepts of game theory to examine a two-period model where an entrepreneur seeks to issue shares on the market and invest in a productive project that generates outcomes which are publicly announced at the end of the next two periods. The entrepreneur can retain some of her firm's shares and trade them later on the secondary market, after information has been released about the outcomes. The length of the retention period is found to be a signaling mechanism that complements ownership retention. Depending on the information structure of the firm, a longer retention period may reduce or increase the retention level necessary for separation. The model also shows that there are realistic situations in which entrepreneurs prefer to retain a portion of their firm's shares for longer than the minimum retention period imposed by regulations, and others in which she prefers the shortest period possible. The optimal combination of under-diversification and commitment is shown to depend on the information structure and the probability distribution of outcomes of the firm. The empirical implications of the model are tested on the set of firms that made an initial public offering in 1981. Although the results of the tests are generally consistent with the predictions of the model, they are not strong enough to reject the null hypotheses.
Item Metadata
Title |
A two-period model of signaling with ownership retention
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Creator | |
Publisher |
University of British Columbia
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Date Issued |
1992
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Description |
This dissertation is an extension of Leland and Pyle's (1977) signaling model. It introduces the
length of the retention period to which the entrepreneur commits in the prospectus as a signal
of firm value, in addition to the retention level.
The analysis uses concepts of game theory to examine a two-period model where an entrepreneur
seeks to issue shares on the market and invest in a productive project that generates
outcomes which are publicly announced at the end of the next two periods. The entrepreneur
can retain some of her firm's shares and trade them later on the secondary market, after
information has been released about the outcomes.
The length of the retention period is found to be a signaling mechanism that complements
ownership retention. Depending on the information structure of the firm, a longer retention
period may reduce or increase the retention level necessary for separation.
The model also shows that there are realistic situations in which entrepreneurs prefer to
retain a portion of their firm's shares for longer than the minimum retention period imposed
by regulations, and others in which she prefers the shortest period possible. The optimal
combination of under-diversification and commitment is shown to depend on the information
structure and the probability distribution of outcomes of the firm.
The empirical implications of the model are tested on the set of firms that made an initial
public offering in 1981. Although the results of the tests are generally consistent with the
predictions of the model, they are not strong enough to reject the null hypotheses.
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Extent |
5146325 bytes
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Genre | |
Type | |
File Format |
application/pdf
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Language |
eng
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Date Available |
2008-12-16
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Provider |
Vancouver : University of British Columbia Library
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Rights |
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
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DOI |
10.14288/1.0086536
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URI | |
Degree | |
Program | |
Affiliation | |
Degree Grantor |
University of British Columbia
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Graduation Date |
1992-11
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Campus | |
Scholarly Level |
Graduate
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Aggregated Source Repository |
DSpace
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Item Media
Item Citations and Data
Rights
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.