The Bird-in-the-Hand Theory

C

The Bird-in-the-Hand theory implies that as the dividend pay-out ratio is increased, the stock price increases.

The Bird-in-the-Hand theory is a concept in finance that suggests investors prefer receiving dividends rather than relying on potential future capital gains. According to this theory, as the dividend pay-out ratio is increased, the stock price is expected to increase.

The dividend pay-out ratio refers to the proportion of a company's earnings that is distributed to shareholders in the form of dividends. If a company has a high dividend pay-out ratio, it means that a larger portion of its earnings is being distributed as dividends.

The reasoning behind the Bird-in-the-Hand theory is that investors place a higher value on receiving a certain dividend payment in the present compared to the potential uncertainty of future capital gains. By increasing the dividend pay-out ratio, a company is effectively signaling its willingness to distribute a larger portion of its earnings as dividends, which can be seen as a positive signal to investors.

When a company increases its dividend pay-out ratio, it is likely to attract income-oriented investors who seek a reliable stream of dividend income. These investors may be willing to pay a premium for stocks that offer higher dividend yields. Consequently, the increased demand for the stock can lead to an increase in its price.

Therefore, based on the Bird-in-the-Hand theory, the correct answer to the question is C. As the dividend pay-out ratio is increased, the stock price is expected to increase.