When firms increase dividends, stock prices tend to increase. One reason given for this price reaction...
When firms increase dividends, stock prices tend to increase. One reason given for this price reaction is that dividends operate as a positive signal. What is the increase in dividends signalling to markets? Will markets always believe the signal? Why or why not?
Homework Answers
The increase in dividends signalling the market that the firm is generating excess cash flow that can be given out as dividends. The management cannot manupulate increase in dividends. The company must have cash to pay out dividends.
The markets may not always believe the signal, because there is still uncertainty regarding whether the company can sustain increasing the dividends year after year.
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When firms increase dividends, stock prices tend to increase.
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