This thesis explores theoretical and empirical issues related to the use of signaling to overcome uncertainty about firm reputation. We first explore this issue in the context of highly leveraged transactions performed to signal quality. Empirical evidence demonstrates that product prices increase following leveraged transactions executed in response to an unwanted takeover attempt, unless the rival firm is relatively unleveraged and has very large market share. Using a duopoly model, it is demonstrated that prices can rise or fall in response to increased leverage, and decreased prices are more likely when the rival firm is lightly leveraged and has a large market share. Financial policy is endogenized. Insight is provided about how industry variables influence the relationship between financial policy and prices.; We further argue that an entrant may use convertible debt to avoid predation in entry deterrence games. This is demonstrated in the context of Poitevin's (1989) deep pocket formalization. We show conversion ratios exist under which creditors have an incentive to convert only if the entrant is a low cost producer. The low cost entrant can therefore issue convertible debt to signal quality to investors. Before production decisions are made, the creditors will convert, preventing predation. This model differs from Stein (1992) as it emphasizes predatory pricing avoidance, and does not require a call feature. The 1991 Euro Disney S.C.A. issue of convertible bonds with strong call protection is used as an illustration.; We next investigate the nature of the mid-loan relationship between bank-lenders and borrowers, to test whether firms borrow from banks to signal quality. Using the LPC Deal Scan, CRSP, and Wall Street Journal databases, we develop a rich data sample. We test the sample for whether borrower abnormal returns are related to bank, borrower, deal and/or event characteristics during the duration of the loan. We demonstrate that borrower abnormal returns are related to mid-loan bank events, defined as an event resulting in bank abnormal returns beyond a specified threshold. The results provide insight into the nature of the relationship between banks and borrowers, and suggest that borrowers are affected by bank events mid-loan, even when the event is not directly related to bank default.
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