Why are dividend changes rather than the absolute level of dividends perceived to be more important to managers and shareholders?
A) Managers change dividends only under threatening conditions.
B) Dividend changes are thought to signal future expectations.
C) MM's argument states that the absolute level of dividends is irrelevant.
D) Dividend changes determine whether borrowing must occur.

Question

Quizplus · Accepted Answer

Dividend changes are perceived to be more important than the absolute level of dividends because they signal the expectations that the company has for future earnings, growth, and cash flow. Managers and shareholders use dividend changes as an indicator of the company's financial health and prospects, making them a crucial factor in decision-making. This is in line with the signaling theory, which argues that changes in dividends are a signal of a company's expected future performance.

Why Are Dividend Changes Rather Than the Absolute Level of Dividends