The M&M dividend irrelevance theory assumes that all investors have the same information regarding the firm’s future earnings.
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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