Ie. Brick et al., ASYMMETRIC INFORMATION CONCERNING THE VARIANCE OF CASH FLOWS - THE CAPITAL STRUCTURE CHOICE, International economic review, 39(3), 1998, pp. 745-761
This paper assumes that a higher valued firm is distinguished from its
lower valued counterpart by having a cash Bow distribution with a low
er variance. A separating (sequential) Nash equilibrium signaling mode
l is developed in which firms use the levels of debt and dividends to
convey information to the market regarding the variance of their under
lying cash Bow. In contrast to most, if not all, debt signaling models
, the higher quality firm signals its value by issuing new equity (dec
reasing the leverage) while simultaneously offering cash dividends.