A Firm Unexpectedly Decreases Its Dividend Payout and Its Stock

question 96

Multiple Choice

A firm unexpectedly decreases its dividend payout and its stock price falls. The information content effect at least partially explains the fall in stock price since

• A) An unexpected decrease in dividends means management is signaling that the firm has no positive NPV projects in which to invest.
• B) Investors will always react unfavourable to changes in dividends.
• C) Investors react to the change as new information regarding expected future dividends.
• D) This unexpected decrease may likely be viewed as an attempt by management to manipulate the stock price.
• E) Unexpected changes in dividends will not affect stock prices if the firm has a written dividend policy.

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Definitions:

Clinical Psychology

A branch of psychology that focuses on diagnosing and treating mental, emotional, and behavioral disorders.

Doctorate

The highest level of academic degree, typically requiring advanced study and research in a specific field.

Critical-thinking Guidelines

Principles or strategies designed to promote the objective analysis and evaluation of an issue in order to form a judgment.

Gut Reaction

An immediate or instinctive emotional reaction to something, without conscious thought.