Signaling theory of capital structure:

A. Assumes that there is no information asymmetry between outside Investors and corporate insiders (managers).

B. suggests that stock prices will increase when firms issue more equity.

C. suggests that investors infer changes in capital structure as "signals" of a firm's profitability and buy/sell the firm's stocks accordingly.

D. suggests that increase in debt is a negative signal of a firm's profitability.

E. suggest that firms should use internal cash first, followed by debt, and finally use equity as the last resort for the source of financing.

Signaling theory of capital structure: Assumes that there is no information asymmetry betwoon outside investors and corporate lasiders (managers). suggests that stock prices will increase when firms issue more equity. suggests that investors infor changes in capital structure as "signals" of a firm's profitability and buy/sell the firm's stocks accordingly. suggests that increase in debt is a negative signal of a firm's profitability. suggest that firms chould use intemal cash fret, followed by debt, and finally use equity as the last rosort for the source of financing