We develop a signaling game model of investment to explore the effects of ambiguity aversion on corporate equilibrium strategies, investment dynamics, and financing decisions in incomplete markets with asymmetric information. Our analysis shows that volatility ambiguity aversion has a similar but more pronounced effect than asymmetric information, leading to higher financing costs, lower investment probabilities, and a greater likelihood of non-participation in investment. Importantly, volatility ambiguity aversion exhibits an amplifier effect, magnifying financing costs, adverse selection costs, and distortion in investment choices under asymmetric information. This increased ambiguity aversion raises the chances of inefficient separating and pooling equilibria, resulting in notable welfare losses. These findings highlight the significant impact of ambiguity aversion on strategic decision-making and equilibrium outcomes in investment, particularly in settings marked by information asymmetry and incomplete markets.

We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results in a significant increase in the adverse selection component of trading cost of politically sensitive stocks. Cross-sectional variations in bid-ask spreads are significantly and positively related to changes in information cost, controlling for the effects of liquidity cost and stock characteristics. This empirical evidence is robust to different estimation methods.