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

Empirical evidence suggests that investors react more negatively to a dividend decrease than positively to a dividend increase. Therefore, Company A's price should increase by less than the decrease in Company B's price. This is because the decrease in dividend for Company B is likely to be perceived more negatively by the market than the increase in dividend for Company A, leading to a larger decrease in its share price compared to the smaller increase in Company A's share price.

Two Identical Companies with Identical Share Prices (And Identical Numbers