Dividend changes are typically viewed by investors as signals of future changes in:
A) investment.
B) the firm's WACC.
C) earnings.
D) the clientele effect.

Question

Quizplus · Accepted Answer

Dividend changes are often seen as signals of future changes in earnings. When a company increases its dividend, it is generally seen as a positive signal that the company's earnings are expected to increase in the future. Conversely, when a company cuts its dividend, it is seen as a negative signal that the company's earnings may be under pressure. As such, many investors view dividend changes as useful indicators of a company's future performance. Choice A is incorrect because dividend changes are not typically viewed as signals of future investment. Choice B is incorrect because dividend changes are not typically viewed as signals of changes in a firm's WACC. Choice D is incorrect because the clientele effect refers to the idea that different types of investors prefer different dividend policies, and is not directly related to the signaling value of dividend changes.

Dividend Changes Are Typically Viewed by Investors as Signals of Future