An unexpected change in dividends shows how directors view the future prospects of the firm. What term is used for this?

Question

Quizplus · Accepted Answer

Signaling is the term used for an unexpected change in dividends that shows how directors view the future prospects of the firm. It is because the directors signal their confidence or lack of confidence in the firm's future earnings potential by changing the level of dividends. Dividend policy refers to the overall strategy that a firm uses to determine the amount and frequency of dividends paid to shareholders, whereas director-variability and prospecting are not relevant terms in this context.

An Unexpected Change in Dividends Shows How Directors View the Future