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Screening, Market Signalling, and Capital Structure Theory

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  • Lee, Wayne L
  • Thakor, Anjan V
  • Vora, Gautam

Abstract

This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approachs. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's priori imperfectly known earnings distribution and use this information in specifyihng a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt-equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution.
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Suggested Citation

  • Lee, Wayne L & Thakor, Anjan V & Vora, Gautam, 1983. "Screening, Market Signalling, and Capital Structure Theory," Journal of Finance, American Finance Association, vol. 38(5), pages 1507-1518, December.
    • Handle: RePEc:bla:jfinan:v:38:y:1983:i:5:p:1507-18
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    Cited by:

    1. Fiset, John & Oldford, Erin & Chu, Shaner, 2021. "Market signaling capacity of written and visual charismatic leadership tactics," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    2. Chaney, Paul K. & Thakor, Anjan V., 1985. "Incentive effects of benevolent intervention : The case of government loan guarantees," Journal of Public Economics, Elsevier, vol. 26(2), pages 169-189, March.
    3. Umeair Shahzad & Fukai Luo & Jing Liu, 2023. "Debt financing and technology investment Kuznets curve: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 751-765, January.
    4. Shah, Salman & Thakor, Anjan V., 1987. "Optimal capital structure and project financing," Journal of Economic Theory, Elsevier, vol. 42(2), pages 209-243, August.

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