According to the signaling theory that has been proposed to explain differences in firms' capital structures, which of the following actions by the management is taken as a signal that a firm's future prospects are not bright (i.e., not good)? (Assume that the firm has multiple financing alternatives.)
A. A small company raises new capital by issuing of new shares of common stock.
B. A mature company raises new capital by issuing of new shares of common stock.
C. A small company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future.
D. A mature company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future.
E. A mature company raises new capital by issuing debt beyond the amount that is indicated by its normal target capital structure.
Answer: B
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