One implication of the bird-in-the-hand theory of dividends is that a reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Question

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The bird-in-the-hand theory suggests that investors prefer immediate dividends over future capital gains. Therefore, if a firm reduces its dividend yield, investors may demand a higher required return to compensate for the loss of current income, which could result in a decrease in the firm's stock price. To offset this, the firm must increase its growth rate to maintain the same required return, and this increase must be more than proportional to the reduction in dividend yield.

One Implication of the Bird-In-The-Hand Theory of Dividends Is That