Final answer:
Management behavior that results in the issuing of new debt is often seen as negative news by investors because it may indicate potential struggles with covering additional debt service, based on the concept of financial signaling. The correct option is 2.
Step-by-step explanation:
According to the concept of financial signaling, management behavior results in new debt issues being regarded as negative news by investors.
When a company becomes somewhat established and its likely profitability is evident, the details about its management and business plan become less important to outside investors like bondholders and shareholders, as more information is available about the company's products, revenues, costs, and profits.
However, when a firm chooses to raise financial capital by issuing new debt, investors may interpret this as a signal that the firm might not have enough income to cover additional debt service, hence viewing it as negative news.
A firm must decide how to access financial capital—whether to borrow from a bank, issue bonds, or issue stock. Issuing bonds commits the firm to scheduled interest payments, while issuing stock involves selling off company ownership and becoming responsible to a board of directors and shareholders.