AFB,Inc.declared a dividend of $2 per share,which was an increase of 25% from the prior year,yet AFB,Inc.stock declined by 3% the day of the announcement.DAS,Inc.declared a dividend of $2 per share,which was the same as the prior year,and its stock increased in value by 2% on the day of the announcement.These events could be most readily explained by the
A) information effect.
B) clientele effect.
C) expectations theory.
D) residual dividend theory.

Question

Quizplus · Accepted Answer

The expectations theory suggests that stock prices react to dividend announcements based on whether the announcement meets, exceeds, or falls short of investor expectations. AFB's stock declined despite a dividend increase, possibly because investors expected a larger increase. Conversely, DAS's stock increased because the dividend met or exceeded investor expectations.

AFB,IncDeclared a Dividend of $2 Per Share,which Was an Increase