The relationship between ownership, financing decisions and firm performance:a signaling model

Bajaj, Mukesh and Chan, Yuk-Shee and Dasgupta, Sudipto (1998) The relationship between ownership, financing decisions and firm performance:a signaling model. International Economic Review, 39 (3). pp. 723-744. ISSN 0020-6598

Abstract

We develop a signaling model to show how adverse selection and moral hazard interact to determine a firm's ownership structure and financing and investment decisions endogenously. Testable implications are derived regarding the relationship between insider ownership, performance measures such as Tobin's Q ratio, and elements of financial structure such as the debt-equity ratio.