Question

Using signal theory, explain how and why the geographic location of a public company is important to its dividend policy.

Answer 1

According to signaling theory higher the dividend paid or increase in dividend payout shows of prosperity of the future of the firm. The geographical location of a firm is very important in Dividend policy because if the firm is located in a local or remote area it will prefer regular dividend payments .they will not stick on special dividend or repurchase of dividends. The firm located in remote area will provide higher or regular dividend for shareholders. That is beacuse of the high cost incurred by shareholders relating to investment decisions.It will also helps to get rid of the free cash flow problem which will affect the shareholders and the firm so that they will prefer a regular dividend.