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The Signalling theory - Essay Example

Author : candicedoyle
Finance & Accounting
Pages 7 (1757 words)
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In economics, this is where one group plausibly conveys information to another about themselves. The stock market is affected by the decisions made by managers in relation to changing the capital structure and payout policies of their organization. …

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The Signalling theory

Similarly, human interactions rely on signals most of the time. The signals enable people to identify some hidden qualities of the other person. The theory focuses on providing comprehension of the varied signals as well as noting, which are dependable. For example, in making decisions, employers and managers rely on the information they obtain from the signals they receive. For instance, in making decisions about capital structures and payout policies, a manager would rely on the existing arrangement and try to evaluate its effectiveness before deciding on the next step (Chang & Hong 2000). Signals according to the theory can be categorized into assessment and conventional signals. The assessment signals denote the signals that are reliable; that is, they are signals that tend to restrict individuals who do not pose the quality required by the signal from using it. For example, if a manager perceives the organization to be overvalued, he or she should not signal the stakeholders that the organization holds a better opportunity in the future to increase profits by increasing their payouts. This is because implementing the signal will lead to embarrassment of the manager as well as create distrust. The conventional signals on the other hand denote unreliable indicators. In most cases, the signals are external and can result in heavy consequences. ...
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