Dividend Policy decisions and Capital Structure decisions in relation Essay

Dividend insurance decisions and Capital Structure decisions in relation to Signaling THeory - Essay ExampleUsually the lead will offer a higher price than if she/he would not have received the signal. The assumptions be information asymmetry atomic number 18 that managers are better informed in relation to investors and will conduct to the best interest of current shareholders.The signaling theory assumes that managers and investors have same information but managers normally having better information. Thus, the managers would sell carry if overvalued and bonds if stock is undervalued. The investors clearly understand this and, therefore, overtake new stock gross sales as a negative signal. From the fact that information asymmetry is well known to all, how a corporation raises capital becomes a signal. The major implications of information asymmetry are when the companys prospects are hapless the there is overvaluation of stock as nobody knows except the insiders, everythin g is financed with stock thus the company pile raise more money at a lower cost and when the companys prospects are good then there is undervaluation of stock thus the company uses debt to finance. Overvaluation of stock assumes that once the stock falls, sharing of losses is by old and new stockholders favoring the old stockholders whereas undervaluation assumption is when the stock prices goes high just now the old stockholders will benefit from the gains. This may be simply represented as followsThe signaling view in relation to dividend policy argues that changes in dividend amounts are signals of paramount importance to the investors about managements changes expectation of future earnings (Duke,edu para 1). It is the belief of many that the amount per share companies pay as dividends is a clear indication of the managements belief about future earnings. A pedigree in the dividend amount from a previous high amount is an indication that the management anticipates a crepuscl e in future earnings. It is a practice by most