Dividend Clientele and Changing Dividend Policy

Phone companies in the United States have for long had the following features - they are regulated, have stable earnings, low reinvestment needs and pay high dividends. Many of

14 Black, F. and M. Scholes, 1974, The Effects of Dividend Yield and Dividend Policy on Common Stock Prices and Returns, Journal of Financial Economics, v1, 1-22.

15 Litzenberger, R.H. and K. Ramaswamy, 1979, The Effect of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence, Journal of Financial Economics, Vol 7, 163-196.

these phone companies are now considering entering the multimedia age and becoming entertainment companies, which requires more reinvestment and creates more volatility in earnings. If you were the CEO of the phone company, would you a. announce an immediate cut in dividends as part of a major capital investment plan b. continue to pay high dividends, and use new stock issues to finance the expansion c. something else: Explain.

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