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Signaling with Capital Structure Revisited

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  • Gabrielle Wanzenried
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    Abstract

    We consider a signaling model with a good and a bad type of firm. The market does a priori not know the firm's type. The firms, which are run by equally qualified managers, can use their debt level to signal their true value to the market. In addition to debt, the manager chooses his effort level, which directly affects the firm's product market returns. The effort choice interacts with the signaling mechanism of debt issue and affects the equilibrium debt level. As a result, it is not always possible to derive the type of firm from its capital structure

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    File URL: http://www.vwl.unibe.ch/papers/dp/dp0214.pdf
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    Bibliographic Info

    Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0214.

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    Date of creation: Nov 2002
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    Handle: RePEc:ube:dpvwib:dp0214

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    Keywords: corporate finance; signaling with capital structure; asymmetric information; manager behavior;

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    1. Ravid, S. Abraham & Sarig, Oded H., 1991. "Financial Signalling by Committing to Cash Outflows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(02), pages 165-180, June.
    2. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
    3. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
    4. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
    5. Brick, Ivan E. & Fisher, Lawrence, 1987. "Effects of Classifying Equity or Debt on the Value of the Firm under Tax Asymmetry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(04), pages 383-399, December.
    6. Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151.
    7. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118.
    8. Brick, Ivan E & Frierman, Michael & Kim, Yu Kyung, 1998. "Asymmetric Information concerning the Variance of Cash Flows: The Capital Structure Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 745-61, August.
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