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Signaling Theory


The information asymmetry issue is resolved through the development of signalling theory. Given the significance of information in decision-making, the company must provide information to third parties. The investor needs complete, pertinent, accurate, and current information as a tool for analysis when making an investment decision.

The investor will receive a signal to act based on the published information. The market participant is expected to interpret the information as good news if it has a positive value. The annual report serves as a vehicle for information dissemination and a tool for tracking business success. The annual report includes both mandated disclosure and voluntary disclosure as per the regulation.

According to the signalling theory, the voluntary publication of non-financial information, such as private information, should send a signal to investors that the news is beneficial and boost the value of the company. High-quality businesses are more likely to alert the market to their competitive edge, according to signalling theory. Conversely, low-quality businesses are more likely to just give the required information. Companies are motivated to freely share private information since doing so can be seen as a sign of strong performance and a reduction in information asymmetry. It can reach potential investors and result in a positive reputation. The environmental performance, which indicates sustainable business, signals significant future return chances.

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