Assume that a firm has a steady record of paying stable dividends for years.Market analysts had expected management to increase the dividend by 7.5% in the latest quarter.However,management announced a 15% increase in the current year's dividend.The market value of the stock rose 20% on the day of the announcement.Which of the following would best explain the stock market's reaction to the announcement?
A) Expectations theory
B) Dividend Irrelevance theory
C) Residual Dividend theory
D) Agency theory

Question

Quizplus · Accepted Answer

The stock market's reaction to the announcement can be explained by the expectations theory, which posits that the stock price reflects all available information, including expectations of future dividends. The market had expected a 7.5% increase in dividends, but management exceeded those expectations with a 15% increase, causing the stock price to rise by 20%. The dividend irrelevance theory, residual dividend theory, and agency theory are not applicable in this scenario.

Assume That a Firm Has a Steady Record of Paying