Stock prices react to dividend announcements because the amount of the dividend sends a signal to investors about management's view of the company's prospects.

Question

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When a company announces a dividend, it sends a signal to investors about the company's financial performance and future prospects. A higher dividend indicates that the company is financially sound and expects to continue performing well. As a result, the stock price may rise following a dividend announcement. Conversely, a cut in dividend may signal financial trouble and cause the stock price to fall.

Stock Prices React to Dividend Announcements Because the Amount of the Dividend