Which one of these statements is correct?
A) Dividends tend to fluctuate in direct relation to changes in annual earnings.
B) Managers are less concerned with the change in the dividend than with the actual amount of the dividend.
C) Managers tend to avoid smooth dividends as they don't signal the firm's most recent successes.
D) Managers tend to only increase dividends when they believe the increased amount can be sustained.

Question

Quizplus · Accepted Answer

Managers tend to be cautious when increasing dividends, only doing so when they believe that the increased amount can be sustained. This is because cutting dividends can signal negative news to the market and potentially lead to a decrease in the stock price. Therefore, managers prioritize sustaining dividends over smooth or consistent dividend payments. Option A is incorrect because dividends are not always directly related to changes in earnings. Option B is incorrect because managers consider both the change in dividend and the absolute amount of the dividend. Option C is incorrect because managers may choose to have a more stable dividend policy to signal stability to investors.

Which One of These Statements Is Correct