Dividend policy may affect firm value because
A)there is an unsatisfied clientele that prefers dividends to capital gains.
B)there is an unsatisfied clientele that prefers dividends to capital gains, and there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends.
C)there is an unsatisfied clientele that prefers dividends to capital gains, and well-managed companies prefer to signal their worth by paying high dividends.
D)there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends, and well-managed companies prefer to signal their worth by paying high dividends.

Question

Quizplus · Accepted Answer

The unsatisfied clientele theory suggests that firms should match their dividend policy with the preferences of their investors to maximize the firm's value. Well-managed companies may prefer to signal their worth by paying high dividends, which may attract investors who prefer income over capital gains. Loopholes in the tax system may provide an additional incentive for investors to prefer dividends over capital gains, but this is not the only reason for the impact of dividend policy on firm value.

Dividend Policy May Affect Firm Value Because