The tax clientele effect implies that share price is indifferent to dividend policy because:
A)share price depends on the value of assets in place.
B)investors have no say in dividend policy.
C)in equilibrium,the range of dividend policies available satisfies the needs of investors so that one clientele is as good as another.
D)investors in high marginal tax brackets would pay a premium for shares of companies that pay no dividends.

Question

Quizplus · Accepted Answer

The tax clientele effect suggests that investors in different tax brackets have different preferences for dividend policies. In equilibrium, the range of dividend policies available satisfies the needs of investors so that one clientele is as good as another. Therefore, share price is indifferent to dividend policy. Option A is incorrect because the tax clientele effect suggests that the value of assets in place may affect dividend policy, which in turn could affect share price, but ultimately share price is not driven by dividend policy. Option B is incorrect because investors do have a say in dividend policy through their buying and selling behavior. Option D is incorrect because the tax clientele effect suggests that investors in high marginal tax brackets may prefer companies that pay higher dividends to take advantage of lower tax rates on dividends, rather than preferring companies that pay no dividends.

The Tax Clientele Effect Implies That Share Price Is Indifferent