According to the signaling theory why will a firm with unfav

According to the signaling theory, why will a firm with unfavorable prospects want to sell stock?

A. To have tax benefit/bankruptcy cost trade-off

B. To skip the dividends payable on common stock

C. To increase bankruptcy cost with more debt

D. To share the losses with new investors

E. To maintain a reserve borrowing capacity

Solution

Correct option is > D. To share the losses with new investors

A firm which has unfavorable prospect would sell stock to share losses with new investors.