8291 and the results of a similar survey of the 500

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Unformatted text preview: 81–92. 19. Stewart C. Myers, “The Capital Structure Puzzle,” Journal of Finance (July 1984), pp. 575–592. CHAPTER 12 signal A financing action by management that is believed to reflect its view of the firm’s stock value; generally, debt financing is viewed as a positive signal that management believes the stock is “undervalued,” and a stock issue is viewed as a negative signal that management believes the stock is “overvalued.” Leverage and Capital Structure 533 Suppose, for example, that management has found a valuable investment that will require additional financing. Management believes that the prospects for the firm’s future are very good and that the market, as indicated by the firm’s current stock price, does not fully appreciate the firm’s value. In this case, it would be advantageous to current stockholders if management raised the required funds using debt rather than issuing new stock. Using debt to raise funds is frequently viewed as a signal that reflects management’s...
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This document was uploaded on 01/19/2014.

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