Question

Dividend policy                                                                                

a. Define the information content effect of a dividend, and discuss whether or not it conveys information about a firm’s dividend policy.                                                                                

b. Define the clientele effect of dividend policy, and discuss whether or not it conveys information about a firm’s market value.                                                                                          

Answer 1

a. Information content effect-

The information content of dividend is a financial hypothesis. This is a firm-specific hypothesis contending that the managers of a firm use the dividend as a tool to signal asymmetric information about the firm's future earnings. The information content shall decide the fate of firm's dividend policy. If there is any information which is not in symmetry with the previous kind of dividend pattern this shall have an unusual effect over the firm's dividend policy.

b. Clientele effect-

It refers to the idea that the investors' type attracted to a particular kind of security will affect the price of the security in case when policies or the circumstances related to the policies change. If the dividend policy followed by the company is not as per the investor’s preferences the clientele might choose to sell their stocks. The dissatisfaction from the dividend policy may act as a driving factor in deciding whether or not to continue holding the stocks of the company. This will convey information about the firm's market value as the dividend policy will affect holding or selling the shares which will affect the demand and supply of the shares in the market thereby impacting the market value of the shares.