Investors in growth oriented firms accept the nonpayment of dividends in order to retain earnings partially because they realize that issuing new equity would involve flotation costs that would ultimately lower earnings.

Question

Quizplus · Accepted Answer

Investors understand that issuing new equity would involve costs such as underwriting fees and other expenses, which would ultimately lower earnings. Therefore, they accept the nonpayment of dividends and allow the firm to retain earnings.

Investors in Growth Oriented Firms Accept the Nonpayment of Dividends