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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.
- Spring '11