Assume that a firm has a steady record of paying stable dividends for years. Mar
ID: 2759754 • Letter: A
Question
Assume that a firm has a steady record of paying stable dividends for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement? Please choose from the 4 options below.
Agency theory
Dividend irrelevance theory
Residual Dividend Theory
Expectations Theory
Explanation / Answer
It best explains Expectations Theory.
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