Orion Inc. had a bad year. Sales were down throughout its industry but Orion was particularly hard hit. Its earnings fell by 30% compared to the previous year on a revenue decrease of 20%. Nevertheless the firm paid a dividend that was 30% larger than the previous year's. Management is probably:

Question

Quizplus · Accepted Answer

Management is using the signaling effect by increasing the dividend to signal to shareholders that they have confidence in the firm's future earning capability, despite the recent decrease in earnings. This can help to mitigate any negative perceptions or concerns that shareholders may have about the company's ability to recover from a bad year.  Option A is not necessarily the case, as a 30% earnings drop does not always require an offsetting 30% dividend increase. Option B is unlikely, as paying a larger dividend does not necessarily admit fault on the part of management. Option D is speculative and unsupported by the information provided.

Orion Inc Had a Bad Year