Signaling with Capital Structure Revisited

Gabrielle Wanzenried

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

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

Keywords: corporate finance; signaling with capital structure; asymmetric information; manager behavior (search for similar items in EconPapers)
JEL-codes: D82 G32 J33 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-cfn
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