The use of leverage as a way to signal ________ information to investors is known as the signalling theory of debt.
A)good
B)bad
C)random
D)new
E)old

Question

Quizplus · Accepted Answer

The signalling theory of debt suggests that companies use leverage, or taking on debt, as a way to signal good information to investors. By taking on debt, a company is committing to make regular interest payments and repay the principal amount at maturity, which sends a message to investors that the company is confident in its ability to generate future cash flows to meet these obligations. This can signal that the company expects to be profitable and that the risks associated with investing in the company are lower than they appear.

The Use of Leverage as a Way to Signal ________