According to the signaling theory that has been proposed to explain differences in firms' capital structures, which of the following actions by the management is taken as a signal that a firm's future prospects are not bright (i.e., not good)? (Assume that the firm has multiple financing alternatives.)
A)A small company raises new capital by issuing of new shares of common stock.
B)A mature company raises new capital by issuing of new shares of common stock.
C)A small company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future.
D)A mature company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future.
E)A mature company raises new capital by issuing debt beyond the amount that is indicated by its normal target capital structure.

Question

Quizplus · Accepted Answer

Issuing new shares of common stock by a mature company is often seen as a negative signal because it may indicate that the company believes its stock is overvalued or that it cannot raise funds through debt due to poor future prospects.

According to the Signaling Theory That Has Been Proposed to Explain