According to the Signaling Theory, a Firm with Unfavorable Future

question 17

Multiple Choice

According to the signaling theory, a firm with unfavorable future prospects might issue common stock in an effort to:

• A)share any losses with new stockholders (owners).
• B)increase bankruptcy costs associated with the firm.
• C)skip the regular dividend payments on common stock.
• D)maintain a reserve borrowing capacity.
• E)increase the tax benefit it derives from dividend payments to stockholders.

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Definitions:

Moral Hazard

The increase in risk-taking behavior when an individual or entity is protected from the consequences, typically in an insurance or financial context.

Insurer

An insurer is a company that offers insurance policies to individuals or entities, providing financial protection against losses or damages in exchange for premiums.

Designated Beneficiary

A person named in a legal document who is authorized to receive benefits or assets upon the death of the owner or holder of the document.

Specific Sum

A precise amount of money defined and agreed upon in a contractual or legal context.