According to the signaling theory of capital structure,firms first use common equity for their capital,then use debt if and only if they can raise no more equity on "reasonable" terms.This occurs because the use of debt financing signals to investors that the firm's managers think that the future does not look good.

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The signaling theory of capital structure suggests that firms first use debt financing to signal to investors that the future looks good, and only use equity if they cannot raise more debt on reasonable terms. This is because debt financing implies a greater level of confidence in the firm's future prospects than equity financing.

According to the Signaling Theory of Capital Structure,firms First Use