The concept of signaling suggests that a firm's dividend policy is irrelevant to the value of its common stock.

Question

Quizplus · Accepted Answer

According to the signaling theory, a firm's dividend policy can convey information to investors about the future prospects of the company. A stable or increasing dividend may signal that the company is financially strong and expects to continue performing well, while a decrease or elimination of the dividend may signal financial trouble. Therefore, a firm's dividend policy can affect the value of its common stock.

The Concept of Signaling Suggests That a Firm's Dividend Policy