A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on
A) the tax bias against capital gains.
B) the residual dividend theory.
C) the information effect.
D) the very low agency costs of the corporation.

Question

Quizplus · Accepted Answer

The information effect suggests that increasing dividends can signal to the market that the company is confident in its future earnings and growth prospects. This can positively influence the stock price as investors interpret the dividend increase as a positive signal regarding the company's financial health and growth prospects.

A Corporation with Very High Growth Prospects and Many Positive