Impact of Dividend Policy on Investor Behavior

Medium Dividends And Repurchases Dividend Policy Theories

ABC Corporation is analyzing its dividend policy as it considers a new investment opportunity that requires significant capital. Currently, ABC pays a steady dividend of $4 per share, and management is concerned about how changes in its dividend policy might affect its stock price.

According to dividend policy theories, different approaches to dividends can significantly influence investor perception and company value. The company’s chief financial officer (CFO) suggests evaluating the impact of dividends on the company's overall valuation based on the Modigliani-Miller theorem and the clientele effect.

Taking into account these theories, which of the following best explains the impact of a stable dividend policy on investor behavior and company valuation?

A stable dividend policy attracts investors who prefer predictable income, which can reduce the cost of equity.

A stable dividend policy is irrelevant to investor preferences and does not affect company valuation.

A stable dividend policy increases firm value only when the opportunity cost of retained earnings is high.

Hint

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