Signaling Theory of Capital Structure: Impact of Increased Bankruptcy Costs

The Signaling Theory of Capital Structure

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According to the Signaling Theory of capital structure, an increase in bankruptcy costs:

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A. B. C. D.

C

The Signaling Theory of capital structure considers the decisions of a firm's manager to raise debt or equity capital as a function of the relative profitability prospects of the firm's projects. It does not use bankruptcy costs as an explanation of the debt ratios prevalent in various industries. Bankruptcy costs are used by the Trade-off Theory of capital structure.

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