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Financial Signalling by Committing to Cash Outflows

Published online by Cambridge University Press:  06 April 2009

S. Abraham Ravid  and
Oded H. Sarig
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Abstract

We analyze a model in which firms signal their quality by using financial policies to commit to cash outflows. Two financial policies may be used: dividend and debt-service obligations. We find sufficient conditions for the informational equilibrium to entail concommitant use of both dividends and leverage in the cost-minimizing combination of the commitment signal. In this equilibrium, better firms pay higher dividends and are more highly levered than lower quality firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 2 , June 1991 , pp. 165 - 180
Copyright
Copyright © School of Business Administration, University of Washington 1991

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