Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?
A) the clientele effect
B) the residual dividend theory
C) the information effect
D) the expectations theory

Question

Quizplus · Accepted Answer

The information effect theory suggests that changes in dividend payments can communicate important information to investors about the company's future earnings potential. Therefore, dividend changes can be used as a credible communication tool to signal investors about future earnings under the information effect theory.

Dividend Changes May Be Used by Management as a Credible