Robust Corporate Signaling with Heterogeneous Beliefs

Abstract

We study the ability of a manager to use costly corporate signaling to reveal private information about firm characteristics prior to entering a new round of equity financing. We assume that the manager and the investor that provides financing may have heterogeneous and privately known beliefs regarding the value of firm characteristics. We show that equity prices under any informative signaling scheme must necessarily rely on the investor's perceived distribution of managerial beliefs. Therefore, incentive compatibility of signaling requires the manager to form precise beliefs regarding their prospective investor's higher order beliefs. Given the practical difficulty of forming correct beliefs regarding the higher order beliefs of other agents, we study robust signaling which remains incentive compatible for all higher order beliefs of the investor. Any robust disclosure mechanism is completely uninformative casting doubt on the efficacy of dynamic corporate signaling.

Keywords: Corporate Signaling, Beliefs, Robustness

JEL Classification: D86, D82, G30