ABSTRACT
In this chapter, I focus on the models about external finance, such as the initial public offering (IPO). In these models, there is asymmetric information between entrepreneurs and investors—investors cannot distinguish good and bad firms by themselves. In the presence of such friction, good firms try to distinguish themselves from the rest through signalling their qualities. These models show corporate capital structure works as a signalling device. I ultimately argue firms undertake a dynamic strategy of capital structure choice, considering their capital structure signals their qualities. Specifically, firms first use internal cash, then raise debt, and finally choose equity as a last option.
