Understanding the Clientele Effect in Dividend Policy

Easy Dividends And Repurchases Dividend Policy Theories

In corporate finance, dividend policy theories provide insights into the relationship between a company's dividend distribution and its overall financial performance. The clientele effect is one of the theories that suggest investors have different preferences regarding dividend policies. This theory emphasizes that companies attract specific types of investors based on the dividend policy they adopt. Consider the following statements regarding the clientele effect.

Which of the following best describes the clientele effect in relation to dividend policy?

Investors will only invest in companies that consistently provide high dividends to ensure a steady income.

Investors have varying preferences for dividends, and companies adopt policies that cater to their investor base.

Companies should avoid paying dividends altogether to reinvest all profits for growth.

Hint

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