Stockholders in high tax brackets who do not need the

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Unformatted text preview: in firms whose dividend policies match their preferences. Stockholders in high tax brackets who do not need the cash flow from dividend payments tend to invest in companies that pay low or no dividends. By contrast, stockholders in low tax brackets who need the cash from dividend payments will usually invest in companies with high dividends. This clustering of stockholders in companies with dividend policies that match their preferences is called the clientele effect and may explain why some companies not only pay dividends but increase them over time. Markets view dividends as signals: Financial markets examine every action a firm takes for implications for the future. When firms announce changes in dividend policy, they are conveying information to markets, whether they intend to or not. By increasing dividends, firms commit to paying these dividends in the long term. Their willingness to make this commitment indicates to investors that they believe they have the capacity to generate these cash flows in the long term. This positive signal sho...
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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.

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