Signaling Approach

Signaling Approach

The idea that insiders have information not available to the market. Moves made by insiders can signal information to outsiders and change the stock price.

Notes:

The thinking goes that if a high level executive such as the CEO is selling, he/she is probably doing so for a reason, so you should get out.

See also: Insider, Insider Information, Insider Trading

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Signaling approach

Notion that insiders in a firm have information that the market does not have, and that the choice of capital structure by insiders can signal information to outsiders and change the value of the firm. This theory is also called the asymmetric information approach.