One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Question

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According to the bird-in-the-hand theory, investors prefer to receive dividends rather than relying on the potential future growth of the company. Therefore, a reduction in dividend yield (amount of dividend paid as a percentage of the stock price) will result in a lower required return for investors, which means that the company would need to increase its growth rate more than proportionately to compensate for the lower dividend yield and keep the required return constant. This relationship between dividend yield and required return is known as the "dividend yield effect." Therefore, the statement is true.

One Implication of the Bird-In-The-Hand Theory of Dividends Is That