Which of the following statements best describes the theories of investors' preferences for dividends?
A) Modigliani and Miller argue that investors prefer dividends to capital gains.
B) The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio.
C) The tax preference theory suggests that a company can increase its stock price by increasing its dividend payout ratio.
D) One key advantage of a residual distribution policy (with all distributions as dividends) is that it enables a company to follow a stable dividend policy.
E) The clientele effect suggests that companies should follow a stable dividend policy.

Question

Quizplus · Accepted Answer

The clientele effect suggests that companies should follow a stable dividend policy because different groups of investors, or clienteles, prefer different dividend policies. Companies attract investors whose preferences match their dividend policies.

Which of the Following Statements Best Describes the Theories of Investors