When a company agrees to take on more debt, it is making a commitment to pay interest on the debt. In doing so, it is showing that the company is in a stable financial situation. Conversely, when the amount of future debt is reduced, investors may see this as a sign that the company is unable to make its interest payments and is in a weak financial situation.
Studies regarding debt announcements and the signals they provide have shown statistically significant results that this theory does actually occur in real life. Subsequently, the theory has been used by proponents of the inefficient market hypothesis.