Question

6. Please discuss the concept of market signaling. Please define the term and list the advantages and disadvantages a company would realize through this concept.

Book: Analysis for Financial Management 12th edition

Answer 1

Passing of information or indications between participants of market is called market signaling. For example if a company declares bonus shares, its an indication to other market players on the stability of future income. Spreading of news as well as activity is considered to be market signaling. Market signaling is amied at various groups, like consumers, investors, lenders, suppliers etc.

The advantages

1. Low cost marketing, with great impact.

2. Advantages for companies intending to go public.

3. Asymmetric informations in market can be used for market signaling to avoid market failuers.

Disadvantages

1. If signals are not observable, it may not give necessary indication

2. Some times signalingcan give negative results or can be advantages to competators

3. Market signals of competators can affect the company negatively