Suppose a company announces an increase in dividends for the quarter, and the market price of the company's stock increases. Which of the following is a possible explanation for the market's reaction?
A) This is an example of a market inefficiency.
B) The market interprets this as a positive signal of the company's future prospects.
C) The market is not omniscient, and therefore this is a violation of the semi-strong form of the efficient market.

Question

Quizplus · Accepted Answer

An increase in dividends is often interpreted by the market as a positive signal regarding the company's future prospects, indicating that the company is confident in its ability to generate earnings. This can lead to an increase in the stock price as investors become more optimistic about the company's financial health and future performance.

Suppose a Company Announces an Increase in Dividends for the Quarter