Signaling

Examples of Signaling in the following topics:

• Signaling Consideration

  • Signaling is the conveyance of nonpublic information through public action, and is often used as a technique in capital structure decisions.
  • That party would then interpret the signal and adjust its purchasing behavior accordingly -- usually by offering a higher or lower price than if the signal had not been received.
  • A basic example of signaling is that of a student to a potential employer.
  • Therefore, investors generally view all capital structure decisions as some sort of signal.
  • Explain how a company's attempts at signaling can affect its capital structure

• Signaling

  • A dividend decision may have an information signalling effect that firms will consider in formulating their policy.
  • This term is drawn from economics, where signaling is the idea that one agent conveys some information about itself to another party through an action.
  • Signaling took root in the idea of asymmetric information, which says that in some economic transactions, inequalities in access to information upset the normal market for the exchange of goods and services .
  • As managers tend to avoid sending a negative signal to the market about the future prospects of their firm, this also tends to lead to a dividend policy of a steady, gradually increasing payment.
  • A company's dividend decision may signal what management believes is the future prospects of the firm and its stock price.

• The Nature of Dividends

  • A firm's dividend decision may also serve as a signaling device which gives clues about a firm's future prospects.
  • Managers tend to avoid sending a negative signal to the market about the future prospects of their firm.
  • Their view is that an eagerness to return profits to shareholders may signal to investors that the management does not have ideas for the firm's future prospects.

• Surprises and Returns

  • A merger or an acquisition could signal to an analyst that one particular company is financially weak, and it could downgrade its long run outlook for that company.
  • Alternatively, an M&A announcement could also signal to analysts that a company has a chance to increase its market share and henceforth its profits.
  • In many cases, there will be signals that analysts pick up on ahead of time.

• Role of Financial Markets in Providing Feedback to Management

  • Financial markets can provide feedback to management by showing signals of the demand to supply funds to that enterprise.

• Calculating Working Capital

  • It signals whether or not the company has enough assets to turn into cash to pay off upcoming liabilities.
  • It is not a perfect signal, however.

• Pecking Order

  • Thus, the form of debt a firm chooses can act as a signal of its need for external finance.
  • This sort of signalling can affect how outside investors view the firm as a potential investment, and once again must be considered by the people in charge of the firm when making capital structure decisions.

• Just-in-Time Technique

  • To meet JIT objectives, the process relies on signals or Kanban between different points in the process.
  • Kanban are usually "tickets" but can be simple visual signals, like the presence or absence of a part on a shelf.

• Bankruptcy Considerations

  • These firms will have to rely heavily on equity, which once again can be seen as a negative signal about the firm's current state.

• Trade-Off Consideration

  • Combine that with the fact that issuing new equity is often seen as a negative signal by market investors, which can decrease value and returns.