One of the implications of signaling theory for capital structure decisions is that firms should normally seek to maintain a reserve borrowing capacity.

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Signaling theory suggests that a firm's choice of capital structure signals information to external stakeholders about the firm's prospects for future profitability and growth. Maintaining a reserve borrowing capacity can signal to investors and creditors that the firm is financially strong and has access to capital if needed, which can boost their confidence in the company and potentially lower the firm's cost of capital. Thus, it is typically advisable for firms to maintain a reserve borrowing capacity to support future growth opportunities or to weather adverse economic conditions.

One of the Implications of Signaling Theory for Capital Structure