The Influence of Legal Liability on Corporate Financial Signaling
23 Journal of Corporation Law 209, Winter 1998
35 Pages Posted: 14 Aug 2013
Date Written: 1998
Legal rules penalize managers more heavily for making direct statements than they do for engaging in financial signaling activity. Therefore, over time, managers will engage in more signaling activity than they would in the absence of legal regulation. It is unlikely that the law provides any social benefit by promoting the use of financial signaling over direct statements. This article develops a theoretical model describing how managers will be more likely to engage in financial signaling than making direct statements given legal liability. Firms that responded to a survey expressing greater concerns over legal liability were more likely to engage in financial signaling than firms without these concerns.
JEL Classification: K2, K22
Suggested Citation: Suggested Citation