The Modigliani and Miller (MM)articles Implicitly Assumed,among Other Things,that Outside

question 67

True/False

The Modigliani and Miller (MM)articles implicitly assumed,among other things,that outside stockholders have the same information about a firm's future prospects as its managers.That was called "symmetric information," and it is questionable.The introduction of "asymmetric information" led to the development of the "signaling" theory of capital structure,which postulated that firms are reluctant to issue new stock because investors will interpret such an act as a signal that the firm's managers are worried about its future.Other actions give off different signals,and the end result is that capital structure is affected by managers' perceptions about how their financing decisions will affect investors' views of the firm and thus its value.

---

Definitions:

Output

The total amount of goods or services produced by a company, industry, or economy within a given period.

Returns to Scale

The rate at which output increases in response to a proportional increase in all inputs (factors of production).

Long-Run Average Total Cost Curve

A graphical representation showing the lowest possible average cost of production, allowing all factors of production to vary in order to minimize cost.

Shape

A distinct form or appearance of an object, often defined by its external boundaries.