When a firm commits to large future debt payments to convince the stock market it has great projects,this is an example of:
A)market timing.
B)adverse selection.
C)the pecking order hypothesis.
D)the agency cost of debt.
E)the signalling theory of debt.

Question

Quizplus · Accepted Answer

The scenario described is an example of the signalling theory of debt, where the firm uses its debt commitments to signal positive information to the market about its future profitability and expected cash flows. This is done to convince investors to buy its stock, leading to higher stock prices.

When a Firm Commits to Large Future Debt Payments to Convince