Which of the following statements is most correct?
A) If you were testing dividend theories and found that a dividend increase resulted in higher stock prices, then you could rule out all other theories and conclude that the bird-in-the-hand theory was most consistent with the evidence you found.
B) The clientele effect suggests that investors choose their investments based on firms' past dividend policies and changes to established dividend policies may be costly to investors.
C) Dividends paid under a residual dividend policy might send conflicting signals to investors.
D) Both statements b and c are correct.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

Statement B is correct as the clientele effect suggests that investors prefer certain dividend policies and changes to established policies may not be well-received by those investors. Statement C is also correct as under a residual dividend policy, conflicting signals can be sent to investors since dividends are only paid out after deducting funds for investments with positive net present values. Statement A is not correct since finding a correlation between a dividend increase and stock price does not rule out other dividend theories or conclusively prove the bird-in-the-hand theory. Therefore, the best choice is D.

Which of the Following Statements Is Most Correct