Financial Management - DIVIDEND POLICIES
Signaling Hypothesis - DIVIDEND POLICIES
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The M&M dividend irrelevance theory assumes that all investors have the same information regarding the firm’s future earnings.
Signaling Hypothesis
The M&M dividend irrelevance theory assumes that all investors have the same information regarding the firm’s future earnings. In reality, however, different investors have different beliefs and some individuals have more information than others. More specifically, the firm managers have better information about future earnings than outside investors.
It has been observed that dividend increases are often accompanied by an increase in the stock price and dividend decreases are often accompanied by stock price declines. These facts can be interpreted in two different ways: Investors prefer dividends to capital gains; unexpected dividend increases can be seen as signals of the quality of future earnings (signaling theory).
The M&M dividend irrelevance theory assumes that all investors have the same information regarding the firm’s future earnings. In reality, however, different investors have different beliefs and some individuals have more information than others. More specifically, the firm managers have better information about future earnings than outside investors.
It has been observed that dividend increases are often accompanied by an increase in the stock price and dividend decreases are often accompanied by stock price declines. These facts can be interpreted in two different ways: Investors prefer dividends to capital gains; unexpected dividend increases can be seen as signals of the quality of future earnings (signaling theory).
Tags : Financial Management - DIVIDEND POLICIES
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