The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

Question

Quizplus · Accepted Answer

MM (Modigliani-Miller) theory argues that dividend policy has no effect on stock price because investors can create their own dividend through selling shares if they desire income. Additionally, increasing dividends may signal to investors that the firm has fewer profitable investment opportunities, which could lead to slower future dividend growth as the firm retains less earnings. Therefore, MM might disagree with the manager of XYZ Corp. that a dividend increase will increase stock price.

The Manager of XYZ Corp