All of the following factors support the proposition that dividend policy matters except:
A) investors desire to minimize and defer taxes, and capital gains get preferential tax treatment over dividend income.
B) perfect capital markets.
C) information asymmetry exists between shareholders and managers.
D) flotation costs significantly increase the cost of new common stock compared to retained earnings.

Question

Quizplus · Accepted Answer

Perfect capital markets assume that all investors have equal access to information, there are no transaction costs, and no taxes. In such a scenario, dividend policy would not matter as investors are indifferent between receiving dividends or capital gains. In reality, however, capital markets are not perfect and investors do consider dividend policy when making investment decisions. Factors such as taxes, information asymmetry, and flotation costs all affect the importance of dividend policy.

All of the Following Factors Support the Proposition That Dividend