The information effect of dividends suggests that dividends are an important communication tool since management might have no other credible way to inform investors about future earnings.

Question

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The information effect of dividends refers to the idea that dividends convey important information to investors about the company's future profitability and financial health. This is particularly true when management has limited other ways to communicate this information to investors. Therefore, dividends can serve as a credible signal to investors about the company's prospects, making them an important communication tool.

The Information Effect of Dividends Suggests That Dividends Are an Important