Two identical companies with identical share prices (and identical numbers of shares outstanding)change their quarterly dividend by the same amount.However,Company A is increasing its dividend while Company B is decreasing its dividend.Choose the correct description of what should follow given the empirical evidence.

Question

Quizplus · Accepted Answer

According to the dividend signaling theory, a decrease in dividends signals negative information about the company's future prospects, while an increase in dividends signals positive information about the company's future prospects. Therefore, Company A's increase in dividends is likely to increase investor confidence and result in an increase in share price, but Company B's decrease in dividends is likely to decrease investor confidence and result in a decrease in share price. Since both companies have identical share prices and outstanding shares, the decrease in Company B's share price is likely to be more significant than the increase in Company A's share price, leading to a net decrease in the overall value of the two companies. Therefore, Option B is the correct answer.

Two Identical Companies with Identical Share Prices (And Identical Numbers