Managing Changes in Dividend Policy

In chapter 10, we noted the tendency on the part of investors to buy stocks with dividend policies that meet their specific needs. Thus, investors who want high current cash flows and do not care much about the tax consequences migrate to firms that pay high dividends; those who want price appreciation and are concerned about the tax differential hold stock in firms that pay low or no dividends. One consequence of this clientele effect is that changes in dividends, even if entirely justified by the cash flows, may not be well received by stockholders. In particular, a firm with high dividends that cuts its dividends drastically may find itself facing unhappy stockholders. At the other extreme, a firm with a history of not paying dividends that suddenly institutes a large dividend may also find that its stockholders are not pleased.

Is there a way in which firms can announce changes in dividend policy that minimizes the negative fall-out that is likely to occur? In this section, we will examine dividend changes and the market reaction to them and draw broader lessons for all firms that may plan to make such changes.

Stocks and Shares Retirement Rescue

Stocks and Shares Retirement Rescue

Get All The Support And Guidance You Need To Be A Success At Investing In Stocks And Shares. This Book Is One Of The Most Valuable Resources In The World When It Comes To

Get My Free Ebook


Post a comment