Dividend Policy Theories - Bird-in-the-Hand Theory

Medium Dividends And Repurchases Dividend Policy Theories

ABC Corporation, a large multinational firm, has consistently returned profits to its shareholders in the form of dividends. Recently, the management has been debating its dividend policy, as some shareholders advocate for higher dividends, whereas others suggest reinvesting in growth opportunities. To make an informed decision, the management is considering dividend policy theories that might guide their approach.

According to the signal the firm sends to the market regarding its financial health, which of the following theories best explains the rationale for maintaining or altering their dividend policy?

The Modigliani-Miller Proposition, which states that in perfect markets, dividend policy does not affect the firm’s value.

The Bird-in-the-Hand Theory, which suggests that investors prefer certain dividends now over uncertain future capital gains.

The Clientele Effect, which posits that different groups of investors have distinct preferences for dividend policies.

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