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Signaling with Capital Structure Revisited

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  • Gabrielle Wanzenried

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

Suggested Citation

  • Gabrielle Wanzenried, 2002. "Signaling with Capital Structure Revisited," Diskussionsschriften dp0214, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp0214
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate finance; signaling with capital structure; asymmetric information; manager behavior;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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