Dividend policy may affect firm value because
I.there is an unsatisfied clientele that prefer dividends to capital gains;
II.there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends;
III.well-managed companies prefer to signal their worth by paying high dividends
A)I only
B)I and II only
C)I and III only
D)II and III only

Question

Quizplus · Accepted Answer

I. Dividend policy can affect firm value due to the existence of an unsatisfied clientele that prefers dividends over capital gains. This clientele effect can contribute to a reduction in the firm's share price if dividend policy changes. Therefore, the preferred strategy is to maintain the existing dividend policy.

III. When a firm pays high dividends, investors may perceive it as a signal of the firm's worth and financial stability. In this way, dividend policy can influence firm value. Companies that pay higher dividends may be perceived as less risky and more stable, which can lead to a higher stock price.

Dividend Policy May Affect Firm Value Because