Investor Reaction to a Decrease in Dividends Following a Period

question 18

Multiple Choice

Investor reaction to a decrease in dividends following a period of deteriorating earnings and declining stock price is likely to be:

• A)they take it in stride, assuming earnings and dividends will return to normal shortly, and are unlikely to either sell the stock or buy more.
• B)they take it as a very bad omen, a statement that management doesn't think the downturn in earnings is temporary, and so they tend to sell the stock forcing its price down further.
• C)they see it as an opportunity to get more of the stock while its price is temporarily depressed, and their purchases tend to drive the price back up.
• D)they tend to sell just enough stock to make up the lost dividend income, but no more.

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