The asymmetric information explanation of capital structure suggests that firms will issue new equity only when the managers believe the firm's stock is overvalued; as a result, issuing new equity is considered a negative signal that will result in a decline in share price.

Question

Quizplus · Accepted Answer

The asymmetric information explanation of capital structure suggests that managers will try to avoid issuing new equity when they believe the stock is undervalued as the issuance of new equity may convey negative information to the market and lead to a decline in share price. Therefore, the statement is true.

The Asymmetric Information Explanation of Capital Structure Suggests That Firms