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.

Question

BlackTom AI · Accepted Answer

Modigliani and Miller assumed symmetric information — outside stockholders have the same information about a firm's future prospects as managers — so financing choice does not change firm value in their baseline world. Introducing asymmetric information (managers possess private, superior information) breaks that result and gives rise to signaling models of capital structure.

Relevant knowledge points:
- MM propositions rely on symmetric information, no transaction costs, and efficient markets.
- Asymmetric information means managers may know more about true firm value than outside investors.
- Signaling theory (Ross 1977; Myers & Majluf 1984) shows financing choices convey information: managers’ actions are interpreted by investors as signals about future prospects.
- Adverse selection: investors anticipate possible bad news when managers issue equity, demanding a discount.

Step-by-step reasoning:
1. Under symmetric information, investors do not infer anything from a financing decision; equity issuance is neutral. MM then says capital structure is irrelevant.
2. With asymmetric information, investors recognize managers might time the market. If managers issue new common stock, rational investors infer managers believe the existing stock is overvalued or that prospects are weak relative to market price.
3. That inference causes the stock price to fall upon announcement, so issuing equity is costly in terms of dilution and price impact.
4. Anticipating this, managers avoid issuing new equity and prefer internal funds or debt — their financing behavior is influenced by how investors will interpret signals.
5. Thus capital structure is endogenously affected by managers’ perception of signaling effects.

Why the correct answer is True:
The passage accurately describes the historical move from MM’s symmetric-information setting to models with asymmetric information and signaling: firms are indeed reluctant to issue equity because investors interpret it as bad news, altering capital structure choices.

Why False is incorrect:
Saying False would deny the well-established linkage between asymmetric information, signaling, and equity-issuance reluctance, which is contrary to theory and evidence.

Final confirmation: True.

类似问题

The following data are available for Halcyon Industries at several capital structures. Based on this information, what is the firm's optimal capital structure? Debt Equity EPS Stock Price 20% 80% $2.40 $24.00 30% 70% $2.68 $25.80 40% 60% $2.95 $27.10 50% 50% $3.20 $26.50 60% 40% $3.44 $25.20

According to Modigliani and Miller, in a world with no corporate taxes a firm cannot change its total value by altering the proportions of debt and equity in its capital structure.

Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ____.

Modigliani and Miller (MM) won Nobel Prizes for their work on capital structure theory.

According to M&M Proposition 2, the cost of a company's equity[Fill in the blank]

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单