Definition for : Signalling theory

Signalling theory is based on the assumption that information is not equally available to all parties at the same time, and that information asymmetry is the rule. Information asymmetries (see also asymmetry – issuer/investor) can result in very low valuations or a sub-optimum Investment policy. Signalling theory states that corporate financial decisions are signals sent by the company's managers to Investors in order to shake up these asymmetries. These signals are the cornerstone of financial communications policy.

(See Chapters Chapter 23 Options and Chapter 36 Returning cash to shareholders of the Vernimmen)

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