Solved Step By Step With Explanation: Dividends

Should dividends be sticky? Are sticky dividends consistent with maximizing shareholder wealth?

Solved Step By Step With Explanation: Dividends

Signaling stability: Companies that maintain or increase their dividends signal stability and financial strength to investors. Consistent dividend payments can be seen as an indication that the company is confident in its ability to generate profits and distribute them to shareholders.

Shareholder expectations: Dividends play a crucial role in attracting and retaining investors. Once a company establishes a dividend policy and starts paying regular dividends, shareholders often come to expect a consistent stream of income. Companies may be hesitant to reduce or eliminate dividends, as it could lead to negative reactions from shareholders, potentially impacting stock prices.