According to the signaling theory of capital structure, the issuance of equity for a firm with various financing alternatives signals that the firm has unfavorable prospects which it wants to share with new shareholders.

Question

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The signaling theory suggests that issuing equity may indicate to investors that the firm's management believes the stock is overvalued or that the firm has poor future prospects, as they are choosing to share the risk with new shareholders rather than taking on debt.

According to the Signaling Theory of Capital Structure, the Issuance