ACCA FM · Chapter 10 · Question 9 of 11
A company that has paid steadily rising dividends for many years announces an unexpected cut in its dividend. Its share price falls sharply. Which theory best explains this reaction?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The signalling (information content) effect of dividends
Explanation
Because investors have less information than directors, they interpret dividend changes as signals of management's view of future prospects. An unexpected cut is read as bad news about future earnings, so the share price falls. The clientele effect relates to investors choosing companies whose dividend policies suit their needs.
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