Firms prefer not paying dividends if it avoids selling new stock, because retained earnings cost less than new equity.

Question

Quizplus · Accepted Answer

Retained earnings do not require the issuance of new stock, which can be costly in terms of underwriting and administrative fees, and can also dilute existing shareholders' ownership percentage. Therefore, firms may prefer to retain earnings and not pay dividends, as it is a cheaper source of funding compared to issuing new equity.

Firms Prefer Not Paying Dividends If It Avoids Selling New