A period of high earnings can leave a firm with excess cash that can be distributed to stockholders as a one-time payment, which can create problems because of signaling effect.

Question

A period of high earnings can leave a firm with excess cash that can be distributed to stockholders as a one-time payment, which can create problems because of signaling effect. ​

Quizplus · Accepted Answer

Distributing excess cash as a one-time payment can signal to investors that the company does not have profitable investment opportunities, which can lead to a decline in the stock price. This is known as the signaling effect.

A Period of High Earnings Can Leave a Firm with Excess