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Journal of Management
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The online version of this article can be found at:
DOI: 10.1177/0149206310388419
2011 37: 39Journal of Management
Brian L. Connelly, S. Trevis Certo, R. Duane Ireland and Christopher R. Reutzel
Signaling Theory: A Review and Assessment
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Signaling Theory: A Review and Assessment
Brian L. Connelly
Auburn University
S. Trevis Certo
Arizona State University
R. Duane Ireland
Texas A&M University
Christopher R. Reutzel
Utah State University
Signaling theory is useful for describing behavior when two parties (individuals or organiza-
tions) have access to different information. Typically, one party, the sender, must choose
whether and how to communicate (or signal) that information, and the other party, the receiver,
must choose how to interpret the signal. Accordingly, signaling theory holds a prominent posi-
tion in a variety of management literatures, including strategic management, entrepreneurship,
and human resource management. While the use of signaling theory has gained momentum in
recent years, its central tenets have become blurred as it has been applied to organizational
concerns. The authors, therefore, provide a concise synthesis of the theory and its key concepts,
review its use in the management literature, and put forward directions for future research that
will encourage scholars to use signaling theory in new ways and to develop more complex
formulations and nuanced variations of the theory.
Keywords: signal; signaling theory; information asymmetry; literature review
39
Acknowledgments: This research was conducted, in part, under the sponsorship of Auburn University’s Lowder
Center for Family Business and Entrepreneurship. In addition, we gratefully acknowledge the guidance and direc-
tion of the editor, Steven Michael, and two anonymous reviewers whose guidance considerably improved our
review.
Corresponding author: Brian L. Connelly, Auburn University, 415 West Magnolia Avenue, Auburn, AL 36849, USA
Email: bconnelly@auburn.edu
Journal of Management
Vol. 37 No. 1, January 2011 39-67
DOI: 10.1177/0149206310388419
© The Author(s) 2011
Reprints and permission: http://www.
sagepub.com/journalsPermissions.nav
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40 Journal of Management / January 2011
When top executives increase ownership stakes in their firms, they communicate to capital
markets that diversification strategies are in the owners’ best interests (Goranova, Alessandri,
Brandes, & Dharwadkar, 2007). A college football coach visits area high schools in a
HummerTM limousine emblazoned with the school’s logo to denote a resource-rich environ-
ment to prospective recruits (Turban & Cable, 2003). Leaders of a young firm in an initial
public offering (IPO) stack their board with a diverse group of prestigious directors to send
a message to potential investors about the firm’s legitimacy (Certo, 2003; Filatotchev &
Bishop, 2002). Each of these examples illustrates how one party may undertake actions to
signal its underlying quality to other parties.
Signaling theory is fundamentally concerned with reducing information asymmetry between
two parties (Spence, 2002). For example, Spence’s (1973) seminal work on labor markets
demonstrated how a job applicant might engage in behaviors to reduce information asym-
metry that hampers the selection ability of prospective employers. Spence illustrated how
high-quality prospective employees distinguish themselves from low-quality prospects via
the costly signal of rigorous higher education. This work triggered an enormous volume of
literature applying signaling theory to selection scenarios that occur in a range of disciplines
from anthropology to zoology (Bird & Smith, 2005).
Management scholars have also applied signaling theory to help explain the influence of
information asymmetry in a wide array of research contexts. A recent study of corporate gover-
nance, for example, shows how CEOs signal the unobservable quality of their firms to potential
investors via the observable quality of their financial statements (Zhang & Wiersema, 2009).
Diversity researchers use signaling theory to explain how firms use heterogeneous boards to
communicate adherence to social values to a range of organizational stakeholders (Miller &
Triana, 2009). Signaling theory is frequently used in the entrepreneurship literature, where
scholars have examined the signaling value of board characteristics (Certo, 2003), top manage-
ment team (TMT) characteristics (Lester, Certo, Dalton, Dalton, & Cannella, 2006), venture
capitalist and angel investor presence (Elitzur & Gavius, 2003), and founder involvement
(Busenitz, Fiet, & Moesel, 2005). Signaling theory is also important to human resource manage-
ment, where a number of studies have examined signaling that occurs during the recruitment
process (Suazo, Martínez, & Sandoval, 2009). As illustrated in Figure 1, the use of signaling
theory has gained momentum in the management literature in recent years as scholars have
expanded the range of potential signals and the contexts in which signaling occurs.
Despite the emergence of signaling theory in management research, as of yet there exists
no concise review in the management literature. As a result, management scholars almost
universally refer to either Spence’s (1973) examination of signaling in job markets or Ross’s
(1977) study of managerial incentives as signals to describe the theory’s central tenets. Over
time, however, the key concepts underlying signaling theory have become blurred (Highhouse,
Thornbury, & Little, 2007), causing some to argue that signaling theory is ill defined (Ehrhart
& Ziegert, 2005). Although a number of studies integrate signaling concepts with related man-
agement theories (e.g., Deephouse, 2000; Ryan, Sacco, McFarland, & Kriska, 2000; Sanders
& Boivie, 2004), no existing management research has systematically described the core
ideas of signaling theory and how management scholars have applied them. We address this
gap in the literature by reviewing management research relying on signaling theory.
Our review offers several intended contributions to management research involving sig-
naling theory. First, we collect and synthesize signaling theory’s key constructs. This includes
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Connelly et al. / Signaling Theory 41
describing the important role of information asymmetry in the signaling process and review-
ing key studies in economics to explicate core signaling concepts. We are hopeful this section
will provide an extra measure of clarity to the literature, as our review revealed that research
in management utilizing signaling theory is laden with inconsistent terminology. We then
consider how management scholars have used the theory to study and explain organizational
phenomena. We examined key studies dealing with these issues from leading management
journals, including the Academy of Management Journal, Academy of Management Review,
Journal of Management, Journal of Management Studies, Strategic Management Journal, Journal
of Business Venturing, Entrepreneurship Theory and Practice, Journal of Applied Psychology,
and Personnel Psychology. This section, we hope, will help unify and integrate the diverse
ways in which management researchers have applied signaling theory to organizational con-
cerns. Lastly, we extend the discussion of signaling theory in the literature by highlighting
and developing a number of potential avenues for future management research. We are hope-
ful the ideas we put forth encourage scholars to use signaling theory in new ways and to
develop more complex formulations and nuanced variations of the theory.
Information Asymmetry and Signaling Theory
Information Asymmetry
Information affects the decision-making processes used by individuals in households, busi-
nesses, and governments. Individuals make decisions based on public information, which is freely
Figure 1
Management Publications That Cite Signaling or Signaling Theory, 1989-2009
0
20
40
60
80
100
120
140
160
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Number of Citations
Publication Year
Note: The search terms included the British variant signalling theory.
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42 Journal of Management / January 2011
available, and private information, which is available to only a subset of the public. Stiglitz
(2002: 469) explained that information asymmetries occur when “different people know dif-
ferent things.” Because some information is private, information asymmetries arise between
those who hold that information and those who could potentially make better decisions if
they had it.
For more than a century, formal economic models of decision-making processes were
based on the assumption of perfect information, where such information asymmetries are
ignored (Stiglitz, 2002). Despite the well-known imperfections of information, economists
had largely assumed that markets with minor information imperfections would behave sub-
stantively the same as markets with perfect information (Stiglitz, 2000). A number of schol-
ars have devoted their careers to understanding the extent to which imperfect information
influences decision making in the marketplace. In fact, George Akerlof, Michael Spence,
and Joseph Stiglitz received the 2001 Nobel Prize in Economics for their work in informa-
tion economics. Advances in this regard appear to reveal the limited utility of many traditional
economic models but also provide insights regarding phenomena that traditional models do not
consider (Stiglitz, 1985).
Stiglitz (2000) highlights two broad types of information where asymmetry is particularly
important: information about quality and information about intent. In the first case, informa-
tion asymmetry is important when one party is not fully aware of the characteristics of
another party. In the second case, information asymmetry also is important when one party
is concerned about another party’s behavior or behavioral intentions (Elitzur & Gavious,
2003). Much of the research on information asymmetry about behavior and intentions exam-
ines the use of incentives as mechanisms for reducing potential moral hazards that result
from an individual’s behavior (Jensen & Meckling, 1976; Ross, 1973). For the most part,
this literature on moral hazard in the context of executive decision making has been well
documented (for an excellent review, see Devers, Cannella, Reilly, & Yoder, 2007). In con-
trast, we focus on the role of signaling in understanding how parties resolve information asym-
metries about latent and unobservable quality, which constitutes the majority of management
studies that explicitly invoke signaling theory.
Signaling Theory
The intuitive nature of signaling theory in part helps explain its pervasiveness. A journalist
once famously asked Spence, who first put forth the theory, if it were possible that one could
receive the Nobel Prize in Economics for simply noticing that in some markets certain par-
ticipants do not know certain things that others in the market may wish to communicate
(Spence, 2002). Spence replied that the correct answer was probably “no” but that what did
blossom at the time was a serious attempt to capture the informational aspects of market
structures. The profundity of the theory, therefore, lies in ascribing costs to information
acquisition processes that resolve information asymmetries in a wide range of economic and
social phenomena.
In his formulation of signaling theory, Spence (1973) utilized the labor market to model
the signaling function of education. Potential employers lack information about the quality
of job candidates. The candidates, therefore, obtain education to signal their quality and reduce
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Connelly et al. / Signaling Theory 43
information asymmetries. This is presumably a reliable signal because lower quality candi-
dates would not be able to withstand the rigors of higher education. Spence’s model stands in
contrast to human capital theory because he deemphasizes the role of education for increasing
worker productivity and focuses instead on education as a means to communicate otherwise
unobservable characteristics of the job candidate (Weiss, 1995).
Kirmani and Rao (2000) provide a general example that helps illustrate a basic signaling
model. Like most examples of signaling, the authors distinguish between two entities: high-
quality firms and low-quality firms. Although the firms in this example know their own true
quality, outsiders (e.g., investors, customers) do not, so information asymmetry is present.
Consequently, each firm has the opportunity to signal or not signal its true quality to outsid-
ers. When high-quality firms signal, they receive Payoff A, and when they do not signal they
receive Payoff B. In contrast, low-quality firms receive Payoff C when they signal and Payoff
D when they do not signal. Signaling represents a viable strategy for high-quality firms when
A > B and when D > C. Given these circumstances, high-quality firms are motivated to signal
and low-quality firms are not, which results in a separating equilibrium. In such cases, outsid-
ers are able to accurately distinguish between high- and low-quality firms. In contrast, when
both types of firms benefit from signaling (i.e., A > B and C > D), a pooling equilibrium
results and outsiders are not able to distinguish between the two types of firms (for a review
of pooling and separating equilibria, see Cadsby, Frank, & Maksimovic, 1990).
Financial economists have developed several examples to demonstrate these general rela-
tionships. They have posited, for instance, that firm debt (Ross, 1973) and dividends (Bhattacharya,
1979) represent signals of firm quality. According to these models, only high-quality firms
have the ability to make interest and dividend payments over the long term. In contrast, low-
quality firms will not be able to sustain such payments. Consequently, such signals influence
outside observers’ (e.g., lenders, investors) perceptions of firm quality. Owing to this foun-
dational work, many of the core concepts and constructs of signaling theory grew out of the
finance and economics literatures (Riley, 2001).
Although most signaling models include quality as the distinguishing characteristic, the
notion of quality can be interpreted in a wide range of relevant ways. For the purposes of our
review, quality refers to the underlying, unobservable ability of the signaler to fulfill the
needs or demands of an outsider observing the signal. In Spence’s classic example, quality
refers to the unobservable ability of the individual, which is signaled by completion of the
educational requirements necessary for graduation. In Ross’s example, quality refers to the
unobservable ability of the organization to earn positive cash flows in the future, which may
be signaled by financial structure and/or managerial incentives. The notion of quality shares
some characteristics with terms such as reputation (Kreps & Wilson, 1982) and prestige
(Certo, 2003), but we put forth that these terms are largely socially constructed and derive
from the signaler’s unobserved quality (or lack thereof).
Key Concepts in Signaling
In the previous discussion, we highlighted the relationship between information asym-
metry and signaling theory. In this section, we review signaling theory’s primary elements in
the form of a timeline, illustrated in Figure 2. The timeline includes two primary actors—the
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44 Journal of Management / January 2011
signaler and receiver—as well as the signal itself. This figure also shows possible feedback
to the signaler and the signaling environment, but we describe these ancillary mechanisms
in the next section where we review signaling in the management literature. Also, some
situations may involve multiple signalers, receivers, and/or signals. For instance, myriad
individuals (e.g., investors, bondholders, etc.) may observe multiple, possibly even compet-
ing, signals sent by different entities within a firm. We circumvent these issues here to
explain the theoretical concepts in their simplest form by focusing on a single dyad, signaler
and receiver, communicating one signal. This approach is consistent with how signaling
theory has developed as a one-to-one or transaction-specific communication.
Signaler. At the essence of signaling theory is that signalers are insiders (e.g., executives
or managers) who obtain information about an individual (e.g., Spence, 1973), product (e.g.,
Kirmani & Rao, 2000), or organization (e.g., Ross, 1977) that is not available to outsiders.1
At a broad level, insiders obtain information, some of which is positive and some of which
is negative, that outsiders would find useful. This information could include, for example,
specifics about the organization’s products or services. Such information might include early
stage research-and-development results or later stage news regarding preliminary sales results
reported by sales agents. Insiders also obtain information about other aspects of the organi-
zation such as pending lawsuits or union negotiations. Simply stated, this private informa-
tion provides insiders with a privileged perspective regarding the underlying quality of some
aspect of the individual, product, or organization.
Signal. Insiders obtain both positive and negative private information, and they must
decide whether to communicate this information to outsiders. Signaling theory focuses pri-
marily on the deliberate communication of positive information in an effort to convey posi-
tive organizational attributes. With that said, some scholars have examined actions taken by
insiders that communicate negative information about organizational attributes. For instance,
issuing new shares of a firm is generally considered a negative signal because executives
Figure 2
Signaling Timeline
t = 0 t = 1 t = 2 t = 3
---------------------------- ------------------------ --------------------------- ---------------------------
SIGNALER
(person, product, or firm)
has underlying quality
SIGNAL is sent to
receiver
RECEIVER observes
and interprets signal.
Receiver chooses
person, product, or firm.
FEEDBACK is sent
to signaler
Signaling Environment
Note: t = time.
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Connelly et al. / Signaling Theory 45
may issue equity when they believe their company’s stock price is overvalued (Myers & Majluf,
1984). It is important to note, however, that insiders generally do not send these negative
signals to outsiders with a view toward reducing information asymmetry, but this is often an
unintended consequence of the insider’s action.
In contrast, signaling theory focuses mainly on actions insiders take to intentionally com-
municate positive, imperceptible qualities of the insider. Insiders could potentially inundate
outsiders with observable actions, but not all of these actions are useful as signals. There are,
however, two chief characteristics of efficacious signals. The first is signal observability,
which refers to the extent to which outsiders are able to notice the signal. If actions insiders
take are not readily observed by outsiders, it is difficult to use those actions to communicate
with receivers.
Observability is a necessary but not sufficient characteristic of a signal; signal cost rep-
resents the second characteristic of efficacious signals. Signal cost is so central to signaling
theory that some refer to it as the “theory of costly signaling” (e.g., Bird & Smith, 2005). The
notion of cost in the signaling context involves the fact that some signalers are in a better posi-
tion than others to absorb the associated costs. The costs associated with obtaining ISO9000
certification, for example, are high because the certification process is time consuming, and
these costs make cheating, or false signaling, difficult. However, ISO9000 certification is less
costly for a high-quality manufacturer as compared with a low-quality manufacturer because
a low-quality manufacturer would be required to implement considerably more change to be
awarded the certification. If a signaler does not have the underlying quality associated with
the signal but believes the benefits of signaling outweigh the costs of producing the signal,
the signaler may be motivated to attempt false signaling. If this were to happen, misleading
signals would proliferate until receivers learn to ignore them. Thus, to maintain their effective-
ness, the costs of signals must be structured in such a way that dishonest signals do not pay.2
Receiver. The receiver of the signal is the third element in the signaling timeline.
According to signaling models, receivers are outsiders who lack information about the
organization in question but would like to receive this information. At the same time,
sign alers and receivers also have partially conflicting interests such that successful deceit
would benefit the signaler at the expense of the receiver (Bird & Smith, 2005). For signaling
to take place, the signaler should benefit by some action from the receiver that the receiver
would not otherwise have done (i.e., signaling should have a strategic effect); this usually
involves selection of the signaler in favor of some alternatives. For example, the receiver
may make a choice about hiring, purchasing, or investing. Studies testing signaling theory
incorporate shareholders (Certo, Daily, & Dalton, 2001) and debt holders (e.g., Elliot,
Prevost, & Rao, 2009) as receivers. Studies in marketing use customers as receivers
(Basuroy, Desai, & Talukdar, 2006; Rao, Qu, & Ruekert, 1999). A key point to this signaling
is that these outsiders stand to gain (either directly or in a shared manner with the signaler)
from making decisions based on information obtained from these signals. Shareholders, for
example, would profit from buying shares of companies that signal more profitable futures.
Similarly, customers would gain from purchasing goods and services that are associated
with signals of high quality.
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46 Journal of Management / January 2011
Management Research on Signaling
Management scholars have applied signaling theory to a range of organizational concerns,
summarized in Table 1. We list the signaler, signal, and receiver that are the primary focus of
each study and note the key contributions the study makes to furthering our knowledge of
signaling theory. In addition to applying the theory, several studies have extended signaling
constructs and integrated the theory with other explanations of organizational phenomena.
Therefore, in Table 2 we summarize definitions of the key concepts from the prior section as
well as those introduced here in our review of signaling theory in the management literature.
Signaler
Signalers in the management literature generally represent a person, product, or firm.
Organizational behavior and human resource management (OB/HR) studies focus mainly
on signals emanating from individuals, such as recruiters (Ehrhart & Zeigert, 2005; Ma &
Allen, 2009; Rynes, Bretz, & Gerhart, 1991), managers (Ramaswami, Dreher, Bretz, &
Wiethoff, 2010), or employees (Hochwater, Ferris, Zinko, Arnell, & James, 2007). However,
some human resource studies also explore firm-level signalers, with a view toward under-
standing how job seekers and applicants examine visible organizational characteristics to
assess unobservable qualities, such as organizational culture (Highhouse et al., 2007; Ryan
et al., 2000). Entrepreneurship studies, on the other hand, focus almost exclusively on the
leaders of start-up and IPO firms as signalers (Bruton, Chahine, & Filatotchev, 2009;
Zimmerman, 2008), although some work examines the signaling that occurs by franchisors
(Michael, 2009) and individual entrepreneurs (Elitzur & Gavious, 2003). Strategy studies
lay somewhere in the middle. Many strategy studies consider the signals sent by firms (Basdeo,
Smith, Grimm, Rindova, & Derfus, 2006; Zhang & Wiersema, 2009), but others are concerned
with specific groups of individuals such as managers (Carter, 2006; Goranova et al., 2007)
and directors (Kang, 2008; Miller & Triana, 2009). Still other strategy studies explore
product signals (Chung & Kalnins, 2001; Lampel & Shamsie, 2000), but these are more
extensively examined in the marketing literature (Gammoh, Voss, & Chakraborty, 2006;
Rao et al., 1999).
Because signalers and receivers have partially competing interests, inferior signalers have
incentive to “cheat,” intentionally producing false signals so that receivers will select them
(Johnstone & Grafen 1993). The potential presence of false signalers is inherent to many
management studies, which places emphasis on the importance of differential signal costs
for high-quality and low-quality signalers (Ndofor & Levitas, 2004). For instance, Westphal
and Zajac (2001) describe how some firms that signal future stock repurchases do not actu-
ally purchase the stock; the authors refer to this discrepancy between formal plans and
subsequent actions as decoupling. Over time, firms and executives that decouple their plans
and subsequent actions may develop a reputation for dishonesty. For this reason, manage-
ment scholars refer to signal honesty (Durcikova & Gray, 2009), which we define as the
extent to which the signaler actually has the underlying quality associated with the signal.
Some management studies use different terms to describe the same concept. For example,
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47
Table 1
Select Review of Management Research Using Signaling Theory, 2000-2009
Year
Author(s)
Journal Signaler Signal Receiver Key Signaling Theory Concepts Addressed
Strategy studies
2000 Deephouse
Journal of Management
Firms Fortune Reputation
rank
Stakeholders • Study integrates resource-based view by discussing
signal value
2000 Lampel & Shamsie
Journal of Management
Movie studios Product aesthetics Consumers • Signals have strength, weak or strong
• Firms underinvest in signaling when differentiation is
high
• Study integrates signaling theory and persuasion
techniques
2001 Chung & Kalnins
Strategic Management Journal
Brand
managers
Advertising and
branding
Consumers • More signals increase signaling effectiveness
• Signaling reduces search costs
• There are penalty costs for false signals
2001 Lee
Strategic Management Journal
Internet firms Firm names Investors • Signals have strength
• Markets are not easily fooled by weak signals
• Signals must be costly to be credible
2002 Coff
Journal of Management
Acquisition
targets
Reputation Acquirers • Firms rely on signals to avoid hazards, avoiding the
adverse selection problem
2003 Karamanos
Journal of Management Studies
Firms Structural
embeddedness
Other firms • Signal strength is conditional on the signals of
competitors
• Signaling reduces search costs
2004 McGrath & Nerkar
Strategic Management Journal
Firms Number of patents
in an industry
Competitors • Costly, same-domain signals are inherently credible
• Study integrates signaling theory with real-options
reasoning
2004 Ndofor & Levitas
Journal of Management
Knowledge-
based firms
Strategic flexibility
and endowments
Capital and
labor
markets
• Signaling environment plays a key role in determining
which signal to use
• Firms that rely on information asymmetry as a basis for
competition must signal quality without losing the value
of their knowledge
2005 Park & Mezias
Strategic Management Journal
Firms Alliance
announcements
Investors • One signal can have multiple meanings
• Signals have different strengths
• Signal strength is moderated by the signaling
environment
(continued)
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48
Table 1 (continued)
Year
Author(s)
Journal Signaler Signal Receiver Key Signaling Theory Concepts Addressed
Strategy studies
2005 Perkins & Hendry
Journal of Management Studies
Top managers Consultant surveys
and qualitative
market outcomes
Board of
directors
• Signals are qualitative, requiring interpretation
• Signals can be unintentional and negative
2006 Basdeo, Smith, Grimm,
Rindova, & Derfus
Strategic Management Journal
Firms Market actions Competitors • The signaling process can change the nature of the
characteristic being signaled
2006 Carter
Journal of Management Studies
Top
management
teams
Press releases Consumers
and the
media
• Study integrates signaling theory with impression
management
• Large firms signal more frequently
• Diversified firms have lower signal consistency
2007 Goranova, Alessandri, Brandes,
& Dharwadkar
Strategic Management Journal
Managers Firm ownership Shareholders • Signals must be observable and are costly to imitate
2008 Kang
Academy of Management
Journal
Boards of
directors
Interlocks Shareholders • Study integrates signaling theory with attribution theory
• Signal strength is contingent on who in the organization
is signaling
2009 Miller & Triana
Journal of Management Studies
Boards of
directors
Diversity Organizational
stakeholders
• Study integrates signaling theory with behavioral theory
of the firm
• Signals that are more visible are more effective
2009 Zhang & Wiersema
Strategic Management Journal
Firms CEO background
and shareholding
Investors • Past deception reduces signal honesty
• Signals reduce information asymmetry
Entrepreneurship studies
2001 Certo, Daily, & Dalton
Entrepreneurship Theory and
Practice
initial public
offering
(IPO) firms
Board structure Investors • Credibility of the signaler affects signal strength
• Good signals are observable and costly to imitate
2002 Filatotchev & Bishop
Strategic Management Journal
IPO firms Insider ownership
Board diversity
Investors • Signals communicate private information for receivers
• Multiple signals (increasing frequency) improves the
likelihood of accurate interpretation
2003 Certo
Academy of Management
Review
IPO firms Board prestige Potential
investors
• Firms consciously use signals to disguise potential
weaknesses (e.g., the liability of newness)
(continued)
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49
Table 1 (continued)
Year
Author(s)
Journal Signaler Signal Receiver Key Signaling Theory Concepts Addressed
Entrepreneurship studies
2003 Davila, Foster, & Gupta
Journal of Business Venturing
Young firms Venture capital
(VC) financing
events
Labor market • Signal credibility changes over time
2003 Elitzur & Gavious
Journal of Business Venturing
Entrepreneurs Approaches angel
investor
Potential
investors
• Signals reduce moral hazards for receivers
2003 Gulati & Higgins
Strategic Management Journal
Young firms Endorsement
relationships and
alliance
partnerships
Potential
investors
• Signal strength is moderated by receiver attention to the
signaler and the signaling environment
• Signals have different strengths
• Signals mitigate uncertainty
2003 Janney & Folta
Journal of Business Venturing
Young firms Private equity
placements
Potential
investors
• Signal frequency improves the signaling process,
especially in dynamic environments
• Signal credibility changes over time
• Signals may be unintentional
2004 Sanders & Boivie
Strategic Management Journal
Young Internet
firms
Corporate
governance
characteristics
Potential
investors
• Uncertainty motivates the receiver
• Study integrates signaling theory with screening theory
• Signals can transfer risk from receiver to signaler
2005 Busenitz, Fiet, & Moesel
Entrepreneurship Theory and
Practice
Young firms Founder ownership VCs • One signal can send multiple messages
• Greater signal cost is an indicator of greater signal
reliability
2005 Cohen & Dean
Strategic Management Journal
IPO firms Top management
team (TMT)
legitimacy
Potential
investors
• Costly signals are more credible, or valid
• Receivers are more likely to attend to costly signals
2005 Daily, Certo, & Dalton
Journal of Business Venturing
IPO firms Various firm
characteristics
listed in
prospectus
Investment
bankers
• Study integrates signaling theory with the resource-
based view of the firm
• Signals may be unintentional
2006 Higgins & Gulati
Strategic Management Journal
IPO firms TMT composition Potential
investors
• Receivers become more attuned to signals as
information asymmetry and uncertainty increase
• Signals have varying strength
• Study integrates signaling theory with upper echelons
theory
• Article introduces a typology of multiple types of signals
(continued)
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50
Table 1 (continued)
Year
Author(s)
Journal Signaler Signal Receiver Key Signaling Theory Concepts Addressed
Entrepreneurship studies
2006 Janney & Folta
Journal of Business Venturing
Young firms Private equity Potential
investors
• Good signals are observable, irreversible, governed, and
credible
• Signal strength is moderated by the signaling environment
• Signals gain or lose strength over time
2007 Balboa & Marti
Journal of Business Venturing
Private equity
operators
Association
membership
Investments
Divestments
Potential
investors
• Different signals may be used in patterns to improve
credibility
• Signals may conflict
2007 Fischer & Reuber
Entrepreneurship Theory and
Practice
Young firms Reputational
characteristics
Organizational
stakeholders
• Signals can be positive or negative
• Study integrates signaling theory with social cognition
theory
• Different receivers process signals differently
2008 Arthurs, Busenitz, Hoskisson,
& Johnson
Journal of Business Venturing
IPO firms Lockup period Potential
investors
• Study integrates signaling theory with bonding and trust
• Different signals may substitute for each other
2008 Bell, Moore, & Al-Shammari
Entrepreneurship Theory and
Practice
Foreign IPO
firms
Geographic scope
Insider ownership
Potential U.S.
investors
• Study integrates signaling theory with institutional
theory and agency theory
• One signal can send multiple messages
2008 Jain, Jayaraman, & Kini
Journal of Business Venturing
IPO firms Insider ownership
Management
quality
Potential
investors
• Study integrates signaling theory with agency theory
• Signals can be positive or negative
• Firms send a wide range of signals that must be managed
2008 Zimmerman
Entrepreneurship Theory and
Practice
IPO firms TMT heterogeneity Potential
investors
• Signalers send only relevant and important information
in their signals
2009 Bruton, Chahine, & Filatotchev
Entrepreneurship Theory and
Practice
IPO firms Retained ownership Potential
investors
• Study integrates signaling theory with agency theory
• Different characteristics require different types of
signals
2009 Michael
Managerial and Decision
Economics
Franchisors Earnings claims Potential
franchisees
• Article challenges traditional economic models that
suggest resource providers will not transact if
information asymmetry is not overcome
• Many high-quality insiders choose not to signal their
underlying quality
(continued)
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51
Table 1 (continued)
Year
Author(s)
Journal Signaler Signal Receiver Key Signaling Theory Concepts Addressed
Organizational behavior and human resource management studies
2000 Ryan, Sacco, McFarland, &
Kriska
Journal of Applied Psychology
Police
departments
Hiring process Police
applicants
• Unintended signals may communicate negative
information to the receiver
• Study integrates signaling with image and expectancy
theory
2001 Srivastava
Organizational Behavior &
Human Decision Processes
Sellers Reservation price Buyers • Signals have credibility based on their cost
• Receivers interpret signals and send feedback with
countersignals
2005 Ehrhart & Zeigert
Journal of Management
Recruiters Recruiter behavior
and activities
Job applicants • Study integrates signaling theory with other theories of
organizational attraction
2007 Hochwater, Ferris, Zinko,
Arnell, & James
Journal of Applied Psychology
Employees Political behavior Coworkers • Signals may be manipulated by the signaler to achieve
greater or lesser fit
2007 Highhouse, Thornbury, & Little
Organizational Behavior and
Human Decision Processes
Hiring
organizations
Various
organizational
characteristics
Job seekers • Signals have both an instrumental inference and a
symbolic inference
• Social identity moderates the relationship between
signaler and receiver
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52 Journal of Management / January 2011
Cohen and Dean (2005) discuss the genuineness and suspiciousness of different signals and
Busenitz et al. (2005) use the term veracity, both of which speak to the signaler’s integrity.
The usefulness of a signal to the receiver depends on the extent to which the signal cor-
responds with the sought-after quality of the signaler (i.e., what we define in the next section
as signal fit) and the extent to which signalers attempt to deceive (i.e., average honesty).
Since both are required, we define this combination as signal reliability. Some management
scholars use the term credibility to describe the same notion, the extent to which the signaler
is honest and the signal corresponds with signaler quality (Davila, Foster, & Gupta, 2003).3
Researchers frequently confuse signal fit, honesty, reliability, and related terms, often using
them interchangeably, but the semantic distinctions we describe here may help clarify their
distinct underlying concepts.
Table 2
Key Signaling Theory Constructs
Construct
(alternate names) Definition Management Journal References
Signaler
Honesty
(genuineness, veracity)
Extent to which the signaler actually has
the unobservable quality being
signaled
Arthurs, Busenitz, Hoskisson, &
Johnson, 2008
Ndofor & Levitas, 2004
Reliability
(credibility)
The combination of a signal’s honesty
and fit
Busenitz, Fiet, & Moesel, 2005
Sanders & Boivie, 2004
Signal
Signal cost Transaction costs associated with
implementing a signal
Bhattacharya & Dittmar, 2001
Certo, 2003
Observability
(intensity, strength,
clarity, visibility)
Signal strength, not accounting for
distortions and deception
Lampel & Shamsie, 2000
Warner, Fairbank, & Steensma, 2006
Ramaswami, Dreher, Bretz, &
Wiethoff, 2010
Fit
(value, quality)
Extent to which the signal is correlated
with unobservable quality
Busenitz et al., 2005
Zhang & Wiersema, 2009
Frequency
(timing)
Number of times the same signal is
transmitted
Baum & Korn, 1999
Carter, 2006
Consistency Agreement between signals from one
source
Chung & Kalnins, 2001
Fischer & Reuber, 2007
Receiver
Receiver attention Extent to which receivers vigilantly scan
the signaling environment
Gulati & Higgins, 2003
Janney & Folta, 2006
Receiver interpretation
(calibration)
Amount of distortion introduced by the
receiver, and/or weights applied to
signals by the receiver
Perkins & Hendry, 2005
Rynes, Bretz, & Gerhart, 1991
Feedback/environment
Countersignals
(feedback)
Responsive signaling from the receiver
designed to improve signal
interpretation
Gulati & Higgins, 2003
Gupta, Govindarajan, & Malhotra, 1999
Distortion Noise that can be introduced by the
signaling environment, external
referents, or other signalers.
Branzei, Ursacki-Bryant, Vertinsky, &
Zhang, 2004
Zahra & Filatotchev, 2004
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Connelly et al. / Signaling Theory 53
Signal
Management scholars have identified a variety of signals of quality. One of the most
central of these combines signaling theory with institutional theory, which sees firms striv-
ing for legitimacy in order to survive (Certo, 2003). One way firms gain legitimacy is by
signaling their unobservable quality with prestigious boards of directors (Certo et al., 2001)
or prestigious top managers (Lester et al., 2006). Somewhat related, others have described
how firms attempt to gain a positive reputation over time as a signal of underlying quality
(Coff, 2002; Deephouse, 2000). Another common signal in the management literature is
focused on the firm’s owners. Because insiders have access to information from which oth-
ers could benefit, they may signal firm quality through insider ownership, which is obviously
costly to the signaler (Filatotchev & Bishop, 2002; Sanders & Boivie, 2004). For start-ups,
founder ownership can be an even more important signal of quality, given that the founder is
likely to have more information than anyone else about firm quality (Busenitz et al., 2005).
Still other signals of quality in the management literature include interorganizational ties (Gulati
& Higgins, 2003; Park & Mezias, 2005), management stability (Perkins & Hendry, 2005),
and intellectual property (Warner, Fairbank, & Steensma, 2006).
Some signals of quality may be more readily detected by the receiver than other signals
are, so management scholars sometimes suggest that signals may be “strong” or “weak” (Gulati
& Higgins, 2003). For instance, Lampel and Shamsie (2000) describe the strength of signals
put out by movie studios about the quality of new film releases. In fact, a recent study by
Ramaswami et al. (2010) draws a theoretical distinction between signal strength and visibility.
These authors describe signal strength as how important, or salient, the signal is for a given
signaler, which we would contend is akin to what we define next as signal fit. Visibility, on
the other hand, is consistent with observability as we defined it in the previous section. Other
management scholars have used related terms, such as signal clarity (Warner et al., 2006),
intensity (Gao, Darroch, Mather, & MacGregor, 2008), and quality (Kao & Wu, 1994), to
describe the same characteristic of observability in the absence of environmental or receiver
distortion.
An important scenario occurs when signalers send signals that are not particularly well
correlated with the signaler’s unobservable quality (Busenitz et al., 2005; Zhang & Wiersema,
2009). The discrepancy between the signal and signaler, in this case, is due to poor signaling.
We, therefore, define signal fit as the extent to which the signal is correlated with unobserv-
able quality. This is a statistical description of the relationship between public information
(the signal) and private information (the signaler’s unobservable quality). Fit and honesty
may be distinguished insofar as the former is a characteristic of the signal, whereas the latter
is a characteristic of the signaler.
Signaling effectiveness can be enhanced by sending more observable signals or increasing
the number of signals, which we call signal frequency (Janney & Folta, 2003). Signals are essen-
tially snapshots pointing to unobservable signaler quality at a particular point in time (Davila
et al., 2003). However, organizations operate in dynamic environments, and information that
is available to both signalers and receivers is constantly changing. If signalers wish to remain
differentiated, they will signal repetitively to keep reducing information asymmetry (Janney
& Folta, 2003, 2006; Park & Mezias, 2005). Signaling repetitively can increase the effectiveness
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54 Journal of Management / January 2011
of the signaling process, especially if one uses different signals to communicate the same
message (Balboa & Marti, 2007). This raises the related issue of signal consistency, which we
define as the agreement between multiple signals from one source (Gao et al., 2008). Conflicting
signals confuse the receiver, making communication less effective, but signal consistency
can help mitigate this problem (Chung & Kalnins, 2001; Fischer & Reuber, 2007).
Although we are concerned mainly with signals of quality in this review, some signals in
management research are aimed at both quality and intent. As an example, Johnson and
Greening (1999) proposed that managerial equity holdings serve as a signal to potential
investors. Managers of high-quality firms demonstrate signaler quality by retaining large
equity positions (Connelly, Hoskisson, Tihanyi, & Certo, 2010). If managers of low-quality
firms imitate this strategy, they would likely experience decreases in personal wealth when
the “true” value of the firm is revealed. Similarly, managerial holdings also point to manage-
rial (signaler) intent (Filatotchev & Bishop, 2002). Whereas managers with high levels of
equity are likely to make decisions consistent with shareholder preferences, managers with
low levels of equity are less likely to make such decisions (Jensen & Meckling, 1976).
Receiver
Receivers in the management literature are generally individuals or groups of individuals.
In entrepreneurship studies, the receiver is nearly always an existing or potential investor,
with some distinction between private (Busenitz et al., 2005; Daily, Certo, & Dalton, 2005;
Michael, 2009) and public (Cohen & Dean, 2005; Jain, Jayaraman, & Kini, 2008) investors.
Strategy researchers have also considered receivers that are existing shareholders, potential
investors, or both (Kang, 2008; Park & Mezias, 2005), but they have also given attention to
a broader array of stakeholders, such as consumers, competitors, and employees (Basdeo
et al., 2006; Carter, 2006). OB/HR studies using signaling theory are most frequently con-
cerned with the labor market, or elements within the labor market, as receivers (Davila et al.,
2003; Ehrhart & Zeigert, 2005).
Management researchers have found that signaling effectiveness is determined in part by
the characteristics of the receiver. For example, the signaling process will not work if the
receiver is not looking for the signal or does not know what to look for. Therefore, we define
receiver attention as the extent to which receivers vigilantly scan the environment for sig-
nals. Gulati and Higgins (2003) lend support for this concept as they find that the success of
a young company’s signaling efforts depends in large part on whether receivers are attending
to the IPO market. Monitoring the environment can be particularly important for weak sig-
nals, which are difficult to observe unless the receiver is looking for them (Ilmola & Kuusi,
2006). Once receivers have received a signal and used it to successfully make an informed
choice, they are more likely to attend to similar signals in the future (Cohen & Dean, 2005).
Others have noted how some receivers interpret signals differently than others do (Perkins
& Hendry, 2005; Srivastava, 2001). We therefore define receiver interpretation as the pro-
cess of translating signals into perceived meaning. For example, Branzei, Ursacki-Bryant,
Vertinsky, and Zhang (2004) describe how different receivers may “calibrate” signals, giving
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Connelly et al. / Signaling Theory 55
signals different strengths or even different meanings. OB/HR researchers have been particularly
helpful in extending our understanding of signaling to include the receiver’s perspective
(Suazo et al., 2009; Turban & Greening, 1996). For instance, Rynes (1991) describes how
job applicants use signals from recruiters to draw conclusions about facets of organizational
quality. Different applicants may not have the same concerns about their potential employ-
ers, so they attend to different signals or interpret the same signal differently (Highhouse et al.,
2007). Receivers may apply weights to signals in accordance with preconceived notions about
importance or cognitively distort signals so that their meanings diverge from the original intent
of the signaler (Branzei et al., 2004; Ehrhart & Zieger, 2005).
Feedback
As management scholars have sought to apply signaling theory to organizational phe-
nomena, a number of studies have uncovered the importance of receivers sending informa-
tion back to signalers about the effectiveness of their signals (e.g., Gupta, Govindarajan, &
Malhotra, 1999). To facilitate more efficient signaling, receivers can send feedback in the form
of countersignals. The fundamental assumption here is that information asymmetry works
in two directions: Receivers desire information about signalers, but signalers also desire
inf ormation about receivers so that they may know which signals are most reliable, to which
signals receivers are paying the most attention, and how receivers are interpreting signals.
Signalers that heed such countersignals can adapt future signals to improve reliability (Gulati
& Higgins, 2003). Thus, in the same way that receiver attention can improve the signaling
process, signaler attention to countersignals can also result in more efficient signaling, par-
ticularly in an iterative or sequential bargaining context (Srivastava, 2001).
Signaling Environment
The signaling environment, either within an organization or between organizations, can
also affect the extent to which signaling reduces information asymmetry (Rynes et al., 1991;
Lester et al., 2006). Environmental distortion occurs whenever the medium for propagating
the signal reduces the observability of the signal. For example, press releases serve as signals
(Carter, 2006), but media outlets reporting on those releases introduce potential distortions.
Branzei et al. (2004) describe how external referents, such as other receivers, can also change
the relationships between signalers and receivers. For example, rankings signal educational
quality for universities, but prospective students calibrate rankings based on the opinions of
peers (i.e., other receivers). When a signal is interpreted by others in a particular way, an
individual who is unsure about how to interpret the signal may look to imitation as a means
of decision making (Sliwka, 2007). This could result in a bandwagon effect, where signals are
interpreted in a certain manner that may or may not be accurate (McNamara, Haleblian, &
Dykes, 2008). Other signalers are also important insofar as more honest signalers increase
signal reliability and larger numbers of deceptive signalers decrease signal reliability.
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56 Journal of Management / January 2011
Future Research
Management research has made substantive contributions toward understanding the com-
plex signaling processes that occur between two parties in an environment of asymmetrical
information. Scholars might pair our review of the management literature with reviews from
biology (Maynard-Smith & Harper, 1995), anthropology (Bird & Smith, 2005), economics
(Riley, 2001), and marketing (Kirmani & Rao, 2000) to form a more complete picture of the
insights gained about signaling theory constructs, relationships, and processes. However, our
review also shows that management research to date generally seeks to apply some of the
most basic principles of signaling theory to help explain foundational signaling relationships.
In contrast, less research has sought to extend the boundaries of what we know about signal-
ing to develop a more comprehensive theory that scholars might use to explain a broader
range of social and organizational phenomena. In this section, we describe some practical
ways to do so, considering each of the key components in the signaling timeline. We also
extend the discussion of future research by putting forward some key research questions in
Table 3 that, if addressed, could inform each aspect of the signaling process. To illustrate our
thinking about each research question, we provide examples for signals that pertain to a per-
son, product, and firm.
Signaler
The questions management scholars choose to examine may have the potential to inform
signaling theory in a number of ways. For instance, because signalers have the option of
sending multiple signals over time; incorporating longer periods of time into signaling theory
represents a viable area for future research. George and Jones (2000) suggest that scholars
consider how the past and the future are represented in a theory’s constructs. The efficacy
of a firm’s signal, for example, may be influenced by historical signals as firms earn a repu-
tation from prior signals (Heil & Robertson, 1991). Scholars have examined how firms may
appoint prestigious directors to signal legitimacy to investors (Certo 2003; Certo et al.,
2001). However, the effectiveness of such signals may depend on the firm’s previous direc-
tor appointments. Future research might investigate whether prestigious directors are more
or less valuable when the firm has already appointed a number of prestigious directors. It may
be, for example, that the value of signals diminishes as the number of signals increases. In
addition, the future is embedded in the present in the form of expectations, possibilities, and
strivings (George & Jones, 2000). This suggests that receivers’ interpretations of signals in
the present could be moderated by their expectations or by what they strive to accomplish in
the future via the signaling process.
The signaler’s choice of when to signal and how often to signal also requires further research
attention. Janney and Folta (2003, 2006) are some of the first to have considered this issue as
they describe a signaler’s use of signals that grow weaker over time. Yet, we know little about
how signalers might find an efficient balance of signal rates and durations, about the conse-
quences of using signals that change faster or slower, and about how signals with different
rates of change might interact with each other to enhance or diminish the signaling process.
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Table 3
Directions for Future Research
Key Research Questions for
Future Study Person Example Product Example Firm Example
Signaler
How can signalers manage a
portfolio of signals to maximize
their collective effectiveness?
Managers signal career progress with
senior mentoring, compensation, and
promotion.
Movie studios send signals about film
quality via commercials, the premier, and
actor salaries.
Firms send signals about quality via top
management team ownership, board prestige,
and CEO tenure.
How does sending different signals
from the same signaler, or the same
signal from different signalers,
reinforce the message being
signaled?
Managers and recruiters send similar, or
conflicting, signals about organizational
culture.
Consultants and former customers send
similar, or conflicting, signals about
customer service.
Founders and venture capitalists send similar, or
conflicting, signals about initial public
offering (IPO) quality.
How can signalers efficiently balance
the rate at which they signal to
effectively reinforce the message
they are signaling?
Employees signal organizational
commitment through voluntary actions
at differential rates.
Advertising repetition is used to signal
brand quality.
New ventures pace their venture capital funding
to reflect growth and increasing value.
Signal
How do negative signals disturb the
signaling process?
Owner absence from daily franchise
operation signals lack of commitment.
Product failures and recalls signal poor
manufacturing.
Poor corporate social performance signals an
unattractive organization to prospective
employees.
What different types of signals do
signalers use?
Recruiters use both “activating” signals
(e.g., on-site interviews) and “pointing”
signals (e.g., brochures) to
communicate organizational culture.
Brand managers use “need” signals to
communicate the extent to which they
require corporate resources for survival
or growth.
Firms use “camouflage” signals to direct
attention away from a liability, such as the
liability of foreignness.
How might signals be coded so that
only intended receivers observe
them?
Employees signal organizational
commitment to managers in their firm
but not to outsiders.
Advertisers signal intended market space to
a targeted social group by using specific
language, idioms, and images.
Firms signal long-term financial objectives to
particular types of investors by controlling
prospectus information.
Receiver
How do receivers meaningfully
aggregate signals in sequences and
patterns?
Applicants in a multiple-hurdle selection
process interpret signals at defined
intervals.
Retailers offer products at discounted rates
at sufficient intervals to signal ongoing
value.
Firms control dividend patterns over time to
signal growth or reinvestment.
How might “signal precedence”
affect receiver interpretation?
Employees recommend cost-saving
initiatives as unprecedented signals of
their own innovativeness.
Technology manufacturers use new features
as unprecedented signals of product
quality.
A firm becomes the first mover in a geographic
market as an unprecedented signal of growth.
How might a systemic model change
our understanding of how signals
are interpreted?
College applicants interpret signals about
campus life and academics in view of
their high school peers.
Consumers interpret signals about brand
image in light of the opinions of
authorities and celebrities.
Investors look to each other to interpret stock
market signals about firm quality.
(continued)
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Table 3 (continued)
Key Research Questions for
Future Study Person Example Product Example Firm Example
Feedback
How does response speed influence
the efficacy of subsequent signals?
The speed of managerial response to
organizational citizenship behaviors
reinforces the use of those signals.
Consumer reaction to price increases or
decreases provides information about the
effectiveness of those signals.
Markets react to firm announcements,
indicating shareholder preferences about
those signals.
How does feedback-seeking behavior
improve the signaling process?
Recruiters communicate with those who
were not hired to learn how their
signals are being interpreted.
Focus groups help firms understand how
signals about their brand are being
interpreted by different social strata.
Start-ups seek advice from venture capitalists
about how to effectively signal quality to
other investors.
How do signaling costs and penalty
costs substitute or complement
each other?
The human resources (HR) reputation has
signal costs (investment in the HR
function) and penalty costs (potential
lawsuits and organizational
inefficiencies).
Cross-branding has signal costs (only firms
with a high-quality, established brand can
signal) and penalty costs (could water
down the established brand).
Sustainability initiatives have signal costs
(investment) and penalty costs (illegitimacy,
long-term performance).
Environment
How do formal and informal
institutions moderate signals?
Organizational citizenship behavior
signals may be more effective in some
organizational cultures than in others.
“Green” products may be a more positive
signal of organizational concern in some
industries than in others.
Host country directors as a signal of legitimacy
for foreign IPOs may be more important for
some home countries than for others.
When do noisy environments
diminish signal observability?
Job applicants signaling quality may be
drowned out by large numbers of
signals and signalers.
Signaling a desired quality on a food
package (e.g., low fat) depends on the
floor space allocated to the package.
Alliance partners have difficulty signaling trust
in industry contexts where distrust
predominates.
How might competing receivers
intentionally inject noise into the
signaling environment?
Employees facing layoffs use gossip or
manipulate work outcomes to signal the
poor quality of other employees.
Rival brands use negative advertising to
signal undesirable characteristics of their
rivals.
Firms establish footholds in a rival’s markets to
diminish the value of the rival’s signals in
those markets.
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Connelly et al. / Signaling Theory 59
It would also be useful to explore the overall rate of deception within a community of
signalers to determine its influence on signal reliability. Sending different signals from the
same signaler, or the same signal from different signalers, could change the way receivers
interpret those signals.
Finally, future research might also further investigate the incentives of signalers. It may
be, for example, that signals are less effective when a signaler has incentives to deceive the
receiver. Studies might examine, for instance, the extent to which signals of firm quality are
more or less predictive of firm performance when CEOs have incentives to artificially
influence stock prices (e.g., Westphal & Zajac, 1998).
Signal
As illustrated in our review, studies of signaling theory often examine the quality of the
signaler. Future research would benefit from examining in more depth the various qualities
signaled and more carefully linking the signals used to measure these qualities. At its essence,
the link between a signal and the underlying quality represents a measurement issue that we
call signal fit. Does the signal represent a valid and reliable measure of the underlying qual-
ity that the signaler is attempting to communicate? Future research may benefit from theo-
retical work examining the conditions required to align signals with the desired signaled
characteristic. In addition, signaling models often distinguish between high-quality and low-
quality firms, but management researchers should note that firms reside on a continuum and
not a dichotomy.
Signals that are not intentional are an avenue for future study that has been relatively
ignored in the literature (Janney & Folta, 2003). Parties may send a wide range of signals
without even being aware they are signaling (Spence, 2002). Such signals could potentially
conflict with intentional signals or be communicating negative information about the sig-
naler. Signalers may have incurred signal costs that are negatively, rather than positively,
correlated with an unobservable characteristic that is valuable to receivers. As yet, however,
there is little empirical study of such negative signals, how they are unique from other sig-
nals, or how they disturb or enhance the signaling process (Bell, Moore & Al-Shammari, 2008;
Fischer & Reuber, 2007).
In fact, there may be opportunity for management scholars to develop a conceptually based
typology of signals that appear in organizational contexts. Biologists have cataloged and
categorized signals from their own discipline in a variety of ways (Hasson, 1997; Maynard-
Smith & Harper, 1995; Vehrencamp, 2000). A large rack of antlers, for instance, is an hon-
est signal that provides females with information about male genetic quality; differential
squawks among nestlings, on the other hand, provide mother birds with information about
which nestlings have the greatest need for food (Zahavi & Zahavi, 1997). Management res-
earchers, too, might consider these classification schemes as a model and begin to partition
the landscape of organizational signals into meaningful categories.
To spur academic discussion along these lines, we offer the following classifications that
could potentially describe different types of signals. Signals of quality, as described in this
review, could potentially be divided into activators and pointers. Pointing signals indicate a
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60 Journal of Management / January 2011
characteristic, apart from the signal, that separates the signaler from competitors. Activating
signals indicate a characteristic that separates the signaler from competitors and are also
essential to activating the quality in the signaler (Hasson, 1997). Thus, for instance, the pres-
ence of outside directors on the board could be considered an activating signal of good cor-
porate governance (Certo et al., 2001) because the directors are an important mechanism of
bringing about good governance.
Still other possible categories include signals of intent, camouflage, and need. Intent sig-
nals indicate future action, possibly conditional on the receiver’s response. Thus, for exam-
ple, when a firm is quick to implement a response to a competitive action initiated by a rival it
may signal toughness and resolve that the firm will not roll over easily in that market (Baum
& Korn, 1999). Camouflage signals disguise a potential liability. These are different from
other signals insofar as they are designed to divert attention away from a potential vulnera-
bility toward some other characteristic. For example, Dacin, Oliver, and Roy (2007) describe
how firms expanding internationally may be subject to liabilities of foreignness, so they use
strategic alliances to draw attention away from those liabilities by signaling organizational
legitimacy. Need signals communicate requirements to the receiver. Thus, for example, in a
firm with multiple divisions or subsidiaries, each is responsible for signaling its need for com-
mon funds and resources, and headquarters is in the position of deciding which are signaling
the greatest need (Gupta et al., 1999).
Receiver
Management research may also benefit from further examining the role of receivers in the
signaling process. As we noted earlier, for example, management research on signaling focuses
to a large extent on shareholders as receivers in the signaling process. Future research might
study the impact of signals on additional stakeholders. For example, as many stakeholders
such as host communities, employees, and customers become increasingly concerned about
sustainability, how can firms signal their commitment to a sustainable enterprise? It seems
that false signaling may be of particular concern in this situation, so how can firms leverage
signal costs and penalty costs to differentiate themselves from lower quality (less sustainably
minded) firms? As firms obtain feedback on the importance of sustainability from different
and possibly competing stakeholders, such as government in the form of regulations and
consumers in the form of behavior, how do they differentially adjust their signaling activity?
An important consideration that has received limited scholarly attention is how receivers
meaningfully aggregate signals. There may be consistencies to the way individuals or orga-
nizations bracket their signaling episodes to ascribe meaning to groups of signals, which in
turn gives rise to different signaling experiences for different receivers based on these group-
ings (Balboa & Marti, 2007). This raises the issue of how receivers interpret sequencing and
signal patterns. To date, signaling theory research has typically focused on a given signal,
but as the theory evolves, scholars could yield greater attention to more complex formula-
tions. An important measure that deserves attention is signal separation, which would describe
the extent to which a given signal in a sequence of signals is temporally or ordinally isolated
from other signals. Similarly, signal precedence is a measure that would describe the extent
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Connelly et al. / Signaling Theory 61
to which a signal precedes or follows other signals. This research could help explain how
receivers organize a coordinated series of signals into meaningful wholes (Rindova, Ferrier,
Wiltbank, & Basdeo, 2002). Future research could explore how firms or individuals manage
their portfolios of signals and how different types of signals interact with one another. Much
in the way music has not only individual notes but also chords and melodies, scholars might
begin to explore how receivers not only interpret individual signals but also examine sequences
and motifs.
Management scholars have relied primarily on a mechanistic understanding of signaling
that emphasizes the technical aspects of signal transmission and reception. Alternative per-
spectives of the signaling process, however, could result in a different understanding of
receiver interpretation. For example, a social constructivist view of signaling might consider
the development of signals within their social contexts (Burr, 2003). In this perspective,
signals would be created, given meaning, and institutionalized as a function of continuously
interacting parties (e.g., Basdeo et al., 2006). Alternatively, applying a systemic model to the
signaling process would emphasize integrated relationships between parts of the whole
(cf. Bertalanffy & Sutherland, 1974, and general systems theory). Such a perspective would
be less concerned with autonomous receivers, preferring instead to describe the entire signal-
ing community as an indivisible whole. Park and Mezias (2005) touch on this perspective by
explaining how the meanings of signals are embedded within the signaling environment. A
systemic model of signaling is consistent with Langfield-Smith’s (1992) notion of a “shared
cognitive map,” where the meaning ascribed to signals is a function not only of individual
interpretation but also of collective beliefs about the signal.
Feedback
We described the central role of costs in signaling theory, which is imperative to discour-
age false signaling. However, the management literature is mainly focused on signal costs,
containing less discussion of the role of penalty costs, which are a form of negative feedback
from the receiver (Gammoh et al., 2006). Future research might explore the extent to which
signal costs and penalty costs serve as substitutes or complements. This would be important
to gaining a better understanding of the implications for the signaling process when penalty
costs are not enforced. Scholars might also consider the relative effectiveness of different
types of penalties. For example, there is a range of negative feedback that may be sent when
a partner in an interorganizational relationship detects a false signal. It may be immediate
(e.g., the receiver could immediately terminate the relationship). It may be delayed (e.g., the
receiver could maintain the relationship but not extend its duration or expand it in other con-
texts). It may be enforced by third parties (e.g., the receiver could leverage the court system
to impose fines for the false signal). Lastly, it may be communal (e.g., the receiver commu-
nicates with other receivers that the signaler is not to be trusted; Chung & Kalnins, 2001). As
scholars, we still have much to learn about what makes an effective penalty and how various
types of penalties interact with signal costs to make a more effective signaling process.
Again considering alternative perspectives, a critical needs model of signaling might change
the way we view feedback in the signaling process. Critical needs theory would emphasize
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62 Journal of Management / January 2011
signaling as a means of extending control and describe signals as overt moves designed to per-
suade or subdue (Held, 1980). Feedback, in this model, would be to the benefit of the signaler
but the detriment of the receiver. For example, scholars arguing from a critical needs perspective
would describe the price of beer as a signal of product quality that beer producers use to manip-
ulate consumers (Van Munching, 1997). Feedback about consumer (receiver) behavior provides
signalers with added information that they may use to adjust their signals and gain even greater
control. The benefits of considering this model in organizational signaling reside in its ability to
explain the influence of power dependencies between signalers and receivers.
Signaling Environment
The signaling environment on the whole is an underresearched aspect of signaling theory.
For example, in interorganizational signaling we might expect different effects to arise from the
influence of the institutional environment, the task environment, and the industry competitive
environment (Sanders & Boivie, 2004). Some of these influences may compete with each other
to make signals more or less observable. As the context in which signaling occurs becomes
more noisy, we would expect the value of the signaling process to diminish (Jiang, Belohlav, &
Young, 2007; Zahra & Filatotchev, 2004). Lester et al. (2006) begin to address this issue as they
consider the influence of environmental dynamism, complexity, and munificence on the signal-
ing process. Although they did not find empirical evidence of moderation in the IPO context,
their conceptual arguments warrant further attention in other signaling contexts.
In addition, management research might further investigate the role of information asym-
metry in studies of signaling theory. Other disciplines have developed measures of informa-
tion asymmetry and incorporated the construct in signaling studies (Aboody & Lev, 2000;
Frankel & Li, 2004), and management research would benefit from this approach. The addi-
tion of information symmetry would allow both theoretical and empirical research in man-
agement to incorporate and further develop the contingent nature of signaling.
Although we have partitioned our discussion of future research into separate sections to
align with the structure of our review, there exist considerable opportunities for future research
to bridge these domains. For example, signals have various characteristics (e.g., reliability,
observability), but these characteristics might take on different meanings when used by dif-
ferent signalers. Similarly, we described areas of research surrounding the signaler and receiver,
but certain signaler–receiver pairs may interact to yield especially effective, or ineffective,
signaling. Also, potential exists for exploring signaling at multiple levels of analysis (Bamberger,
2008). Consider, for instance, how the aggregate signaling that occurs between managers and
subordinates in an organization could have implications for signaling firm quality between
the organization and its stakeholders (Wayne, Shore, & Liden, 1997).
Conclusion
Joseph Stiglitz (2002: 473) observed that some individuals wish to convey information
and others wish not to have information conveyed, but “in either case, the fact that actions
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Connelly et al. / Signaling Theory 63
convey information leads people to alter their behavior, and . . . this is why information
imperfections have such profound effects.” Signaling theory provides a unique, practical,
and empirically testable perspective on problems of social selection under conditions of
imperfect information. In this review, we seek to bring clarity to the abundance of concepts
that permeate the theory; describe the signalers, signals, and receivers that management
scholars have explored as they have used the theory; and lay out a road map for how the
scholarly community might advance the theory. The fact that researchers in areas as diverse
as anthropology, economics, and marketing continue to use signaling theory to explain
selection phenomena in their own disciplines is reassuring. We hope that our review of sig-
naling theory in the management literature will lead researchers to extend and broaden their
use of the theory when studying the eclectic range of selection issues that occur in and between
organizations.
Notes
1. Individuals may also serve as their own insiders when signaling about themselves (e.g., in the job market).
Signals about investments are also common (e.g., Goranova, Alessandri, Brandes, & Dharwadkar, 2007), but we
combine these with organizational signals.
2. Whereas signaling theory focuses mainly on costly signals (Riley, 2001), scholars have also extended
research on information asymmetries to include less costly forms of communication. For example, Farrell and
Rabin (1996), in an article titled “Cheap Talk,” provided an influential analysis of how insiders communicate cost-
less information. In related work, Almazan, Banerji, and De Motta (2008) extended this perspective to model how
managers employ cheap talk to communicate with capital markets.
3. This should be distinguished from the related notion of “credible commitment,” which is more about signaler
intent than signaler quality (Bergara, Henisz, & Spiller, 1998).
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