t be perceived by investors to simply be attempting to better their own posi tions (Copeland, and Weston, 1988).
There are a number of ways in which management may signal investors without destroying their credibility. Management may hold off on exercising stock options, as an example. By acting in this manner, management may be seen to be signaling their belief that higher future earnings will cause the value of their stock options to be greater in the future than they are today (Kalay, 1980). There are a number of other credible sig nals which management may communicate to the market, including the maintaining or raising of dividend levels. The market acts on the information communicated to it by firm management through the application of valuation theory. 3
CAPITAL STRUCTURE AND CAPITAL BUDGETING
Capital structure refers to, among other things, the ratio between equity and debt in a firm. Within this general frame work, capital structure also refers to the types and propor tions of equity securities, and debt instruments issued by a corporation.
The selection from among alternatives in the capital investment process is generally referred to as capital budget ing. Capital budgeting involves the making of investment deci sions related to fixed assets and other long lived assets (Kes ter, and Taggart, 1988). The capital in capital budgeting refers to the financial resources invested in assets, while the budgeting refers to the revenue inflows and outflows related to the capital investment over a specified period of time (Evans, 1987). Budgeting, in this perspective, also refers to the process of rationing or allocating available capital resources, when available capital resources are not sufficient to fund all desirable projects. The purpose of capital budgeting is two fold. First, the process must determine whether or not a proposed capital investment will be a profitable one over the specified ...