Signaling theory and risk perception: An experimental study

Theoretical models provide unsatisfactory solutions to many issues in finance and economics. For some important issues, signaling theory bridges the gap between the theoretical solutions and the firm's actual behavior. However, many of the signaling theories are difficult, if not impossible, to test empirically. In this paper, we provide experimental tests of one of the signaling theories. We test the hypothesis that the larger the proportion of entrepreneur participation in a project, the higher is its stock price, as determined in an auction. The results strongly support the hypothesis.