Which one of the following statements describes the finding from academic studies on corporate dividend policy?
A) Managers tend to increase regular cash dividends in response to unexpectedly high earnings.
B) Managers tend to maintain a level dividend payment at an amount that they are relatively certain they can maintain in the future.
C) Managers tend to focus on dividends rather than share buy-backs because institutional investors tend to prefer regular dividends.
D) Dividend policy doesn't matter because investors can re-create dividends by selling a fraction of their shares.

Question

Quizplus · Accepted Answer

Academic studies suggest that managers tend to maintain a level dividend payment that they are confident of being able to maintain in the future. This helps to mitigate the risk of having to cut dividend payments in the future, which can negatively impact shareholder confidence and the company's stock price. A similar approach is taken with share buybacks, which are typically conducted when managers believe the company is undervalued and they can use excess cash to repurchase shares at a lower price. However, these are not preferred over dividends as institutional investors typically prefer a steady stream of income from regular dividends. Selling shares to create dividend income may not be an optimal strategy as it incurs brokerage fees and capital gains taxes, which reduces the overall return on investment.

Which One of the Following Statements Describes the Finding from Academic