Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?
A) Managers change dividends only under threatening conditions.
B) Dividend changes are thought to signal future expectations.
C) MM state that the absolute level of dividends is irrelevant.
D) Changes determine whether borrowing must occur.

Question

Quizplus · Accepted Answer

Dividend changes are often perceived as signals of future expectations because they are seen as reflecting the company's financial health and management's confidence in its future prospects. This can have a greater impact on shareholder sentiment and stock prices than the absolute level of dividends. MM (Modigliani and Miller) theory also argues that the absolute level of dividends is irrelevant to the market value of the firm, further reinforcing the perception of the importance of dividend changes.

Why Are Dividend Changes Rather Than Their Absolute Level Perceived