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investors to increase the stock price. Decreasing dividends is a negative signal, largely
because firms are reluctant to cut dividends. Thus, when a firm takes this action, markets
see it as an indication that this firm is in substantial and long-term financial trouble.
Consequently, such actions lead to a drop in stock prices.
Some managers cannot be trusted with cash: Not all companies have good investments
and competent management. If a firm’s investment prospects are poor and its managers
are not viewed as careful custodians of stockholder wealth, paying dividends will reduce
the cash in the firm and thus the likelihood of wasteful investments. Looking at the Evidence
Over the last few decades, researchers have explored whether buying stocks based
upon their dividend payments is a good strategy. Some of these studies look at the broad
3 Consider a stockholder who owns 100 shares trading at $ 20 per share, on which she receives a dividend of $0.50 per share. If the firm did...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.
- Spring '11