Dividends and Signaling Theory

Consider a corporation, XYZ Corp, which has maintained a stable dividend payout ratio for several years. Recently, the management of XYZ Corp announced a substantial increase in its dividend, resulting in a dramatic change in the company’s stock price. Analysts have been debating the implications of this decision on the market perception and the firm's long-term growth.

In light of this scenario, which dividend policy theory suggests that the announcement of an increased dividend signals a change in management’s outlook on future earnings and fundamentally alters the stock's valuation?