Question

Consider the Bird in the Hand Theory and explain the following: Why are dividends less risky than pursuing growth opportunities?

Answer 1

Bird in hand theory is opposite of MM theory of dividend irrelevance, Bird in hand theory suggests that dividends are assured and immediately received hence investors prefer dividends over capital gain which is not certain.

Dividend are less risky because of certainty in receipt of cash flow . Pursing growth opportunities delays the benefits and also increases risk or uncertainty in receipt of benefits.. Hence investors want dividends even though the return is less on dividends .