Question

9.       Dividend policy                                 &nb

9.       Dividend policy                                                                         

a. Define the information content effect of a dividend, and discuss whether or not it conveys information about a firm’s dividend policy.                                                                                

b. Define the clientele effect of dividend policy, and discuss whether or not it conveys information about a firm’s market value.                                                                                         

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Answer #1

A.

The information content of dividends theory says that a high dividend indicates that the company is strong and a good investment. The idea is that if a company pays out a high dividend, it is because it is financially sound and will earn a lot in the future, hence yes it conveys information about company's dividend policy.

B.

A dividend clientele is a term for a group of stockholders who share the same opinion on how a specific company conducts its dividend policy. Yes, it does convey information as about company's market value. For example, In 2001, when Winn-Dixie changed its shareholders' annual dividend payments policy to changing monthly payouts to quarterly dividends, its shareholders were not happy, and the stock tanked.

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