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Regardless of how diligent investors may be in monitoring their investments, management of the firm will usually be much better informed about the firm's prospects
Regardless of how diligent investors may be in monitoring their investments, management of the firm will usually be much better informed about the firm's prospects than will most outside investors. When managers recognize that their actions are being interpreted as signals, they may attempt to manipulate the signals to convey a favourable message. Consider the following model. We have three firms, one firm with high cash flows uniformly distributed over the interval [0,1], a second firm with medium cash flows uniformly distributed over the interval [0.M] and another firm with low cash flows uniformly distributed over the interval [0, L). (L
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