Under the signalling model, management will increase dividends when:
A)it is sure the increased payments can be sustained.
B)it has an exceptionally successful year.
C)it believes the stock is underpriced.
D)earnings have fallen over the past few years.

Question

Quizplus · Accepted Answer

According to the signalling model, management will increase dividends only when it is sure that the increased payments can be sustained. This is because increasing dividends is seen as a positive signal by investors, indicating that the company is confident about its future earnings prospects and is in a strong financial position to support higher payouts. Therefore, if management is unsure about the sustainability of higher dividends, it is unlikely to increase payouts as it may lead to investor disappointment if the company is unable to maintain the higher payouts in the future.

Under the Signalling Model, Management Will Increase Dividends When