A New Test of Signaling Theory

Cai, Charlie X.; Duxbury, Darren; Keasey, Kevin

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A New Test of Signaling Theory

Finance Letters, Vol. 5, No. 2, pp. 1-5, 2007

5 Pages Posted: 13 Jan 2008

See all articles by Charlie X. Cai

Charlie X. Cai

University of Liverpool Management School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Abstract

Signaling theories of the pricing of initial public offerings are based on an equilibrium which separates high from low quality companies. In empirically testing these theories one issue which needs addressing is how to identify high and low quality companies. This paper develops a new test of signaling theory where the success or failure of a company is the ultimate measure of high and low quality. On the basis of data from the Dotcom bubble we find that high quality firms were able to signal quality via retained equity and underpricing, but not via underwriter reputation.

Keywords: Signaling theory, IPO market

JEL Classification: G14

Suggested Citation: Suggested Citation

Cai, Charlie Xiaowu and Duxbury, Darren and Keasey, Kevin, A New Test of Signaling Theory. Finance Letters, Vol. 5, No. 2, pp. 1-5, 2007, Available at SSRN: https://ssrn.com/abstract=1082917