It has been observed in the market that most of the increases in dividends are followed by an increase in the stock price and vice-versa. This implies that:
I. at least one of the M&M assumptions must be false.
II. there must be signaling effects involved.
III. investors are behaving irrationally.
Click on the arrows to vote for the correct answer
A. B. C. D. E. F.F
If all of the M&M assumptions held, a change in dividend policy would not cause the stock price to change; dividend policy would be irrelevant. However, one does not necessarily need signaling effects to account for market behavior. Other theories like the Bird-in-the-Hand theories can also explain the phenomenon in the presence of transaction costs. In itself, then, the phenomenon does not imply that the market is behaving irrationally.