Question

What do you think will happen if a firm changes its policy from a high payout to a low payout?Explain

Answer 1

If a firm changes its payout policy, it will not have any impact on the stock value. There are different sets of Investors available in the market as long as the “market” for dividend policy is in equilibrium. In other words, if there is excess demand for companies with high dividend payouts, then a low payout company may be able to increase its stock value by switching to a high payout policy. This is only possible until the excess demand is met.

If a firm changes its policy, it will just have different investors. Consequently, dividend policy won‟t affect the value of the stock.

Incase of any doubt, please comment below. I would be happy to help.
Show your appreciation by upvoting the answer if it was of help to you.