The dividend irrelevance theory states that although the reduction or elimination of dividends in the near term will have a negative effect on P₀:

Question

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The dividend irrelevance theory suggests that dividend policy should have no impact on a firm's stock price. Instead, what matters is the earnings growth rate and the risk level of the company. If a company chooses to retain earnings rather than pay dividends, it can reinvest that money to fuel growth, which can eventually lead to higher dividends in the future. Therefore, the reduction or elimination of dividends in the near term can have a negative effect on shareholders, but the additional earnings retained can help the firm grow faster in the long run, permitting larger dividends. Option A is not relevant to this theory, and option C is incorrect as dividend theories do address the long-term future. Option D is incorrect as option B is the best choice.

The Dividend Irrelevance Theory States That Although the Reduction or Elimination