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At a recent conference, “Dividends − Are They Increasing?”, several lecturers were discussing the signaling effect and their opinions on how changes in a company’s dividend policy are often viewed by investors. Linda Travis, an equity analyst at Girthmore Capital Management and one of the guest lecturers at the conference, made the following observations:
Observation 1: A dividend initiation is always viewed as a positive signal by investors. It is an indication that the company has so much cash at its disposal that it can afford to pay it out to shareholders.
Observation 2: A dividend decrease is typically a positive signal by a company’s management to its shareholders. It indicates that management has a variety of positive NPV projects in its capital budget and would like to finance as many of them as possible with retained earnings.
With respect to Travis' observations: A. both are correct. B. only one is correct. C. both are incorrect. |