Signaling. It is well documented that stock prices tend to rise when firms announce an increase in their dividend payouts. How then can it be said that dividend policy is irrelevant?© BrainMass Inc. brainmass.com October 1, 2020, 8:21 pm ad1c9bdddf
Management is adapting the policy of paying a stable dividend in the face of fluctuating earnings because of following reasons:
? Information content
According to this philosophy, Management may be able to affect the expectations of investors through the informational content of dividends. A stable dividend suggests that the company expect stable or growing dividends in the future.
? Current income desires
As discussed above due to uncertain future some investors who desire a specific periodic income will prefer a company with stable dividends to one with unstable dividends.
? Institutional considerations
A stable dividend may permit certain institutional ...
Dividend signaling is also defined.