According to the signaling theory, a firm with unfavorable future prospects might issue common stock in an effort to:
A)share any losses with new stockholders (owners).
B)increase bankruptcy costs associated with the firm.
C)skip the regular dividend payments on common stock.
D)maintain a reserve borrowing capacity.
E)increase the tax benefit it derives from dividend payments to stockholders.

Question

Quizplus · Accepted Answer

According to the signaling theory, firms with unfavorable future prospects might issue common stock to share any losses with new stockholders (owners). This action sends a signal to the market that the firm has low growth prospects, and it reduces the adverse selection problem by attracting only those investors who are willing to share the risk. Therefore, choice A is the best option. The other choices are not directly related to the signaling theory and are incorrect.

According to the Signaling Theory, a Firm with Unfavorable Future