Debt Signaling

You know the move the Monopoly Man does where he turns his empty pockets inside out and kind of shrugs? That's one kind of debt signalling. You can also open your empty wallet and let a small flying insect escape.

It's also the name of stock-picking strategy. Some traders use announcements that a company is issuing debt as a way to figure out how the firm's stock will do in the future.

Most of a company's debt management takes place behind the scenes. However, when a firm makes a large issuance of debt securities (bonds or notes) it will often put out a press release. There's a theory that the information in the company's announcement can provide clues as to where its share price is headed. This is called "debt signaling."

Assuming the size of the debt issuance isn't out of whack or a sign of desperation, Wall Street generally views these announcements as positive. This may sound counterintuitive, but more debt means more spending cash for the company. These funds get used for expansion, which leads to more revenues and (hopefully) more profits. Bringing on new debt shows confidence on behalf of company management and means there will be fuel for future growth.