Financial Signalling by Committing to Cash Outflows

S. Abraham Ravid and Oded H. Sarig

Journal of Financial and Quantitative Analysis, 1991, vol. 26, issue 2, 165-180

Abstract: We analyze a model in which firms signal their quality by using financial policies to commit to cash outflows. Two financial policies may be used: dividend and debt-service obligations. We find sufficient conditions for the informational equilibrium to entail concommitant use of both dividends and leverage in the cost-minimizing combination of the commitment signal. In this equilibrium, better firms pay higher dividends and are more highly levered than lower quality firms.

Date: 1991
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