According to the signaling theory, why will a firm with unfavorable prospects want to sell stock?
A) To share the losses with new investors
B) To increase bankruptcy cost with more debt
C) To skip the dividends payable on common stock
D) To maintain a reserve borrowing capacity
E) To have tax benefit/bankruptcy cost trade-off

Question

Quizplus · Accepted Answer

According to signaling theory, a firm with unfavorable prospects may want to sell stock in order to share the losses with new investors. By doing so, the firm signals to the market that it is aware of its poor prospects and is taking steps to mitigate them. This can increase the confidence of investors and potentially lead to a better valuation of the stock.

According to the Signaling Theory, Why Will a Firm with Unfavorable