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Doing some practice questions and came across one suggesting the above but with no explanation. Seems to be part of the Clientele Effect.
This goes against the Efficient Market Hypothesis unless there’s is published information indicating poorer future performance or lack of investment in NVP positive projects. This wasn’t mentioned.
Is anyone able to explain (or is it a typo)? Thanks.
Higher dividends mean less dividend growth and less growth in the market value (due to less retention of profits). Lower dividends mean higher growth and higher market value (due to more retention and reinvestment. It is nothing to do with the efficient market hypothesis.
I do explain this in my free lectures.
Couldn’t a higher dividend just indicate higher profitability? Wouldn’t that increase share price/make the company more attractive to investors? Which could see growth accelerating and therefore more future dividend more likely = NPV of future dividends larger.
I can understand if it’s a higher dividend payout as a percentage of earnings – so the retained income is less meaning less investment in NPV positive.
I’ve watched all the videos and googled, I could only find it related to the clientele effect.
You will have to tell me exactly what the question was asking.
Given the answer apparently suggested the statement you wrote, it can only have been in the context of retentionary growth, but I cannot tell without seeing what was actually asked!! If it was a past exam question or if it is in the BPP Revision Kit then tell me which question and I will find it.
Hello Vee and John, not sure if I can contribute.
Companies like Amazon didn’t make profits nor even pay dividends for a while but experienced capital appreciation. I believe that this is part of the clientele effect. When I saw your question, I went straight for the DVM only and concluded that it might have been a typo, because it goes against the DVM. So I think that like John was saying, it depends on how the question was worded.Is there a way you can get in touch, let us be study buddies? My exam is next month.
It is not the clientele effect.
As I explain in my free lectures, higher dividends mean less retention and therefore less future growth in dividends. Lower dividends mean more retention and therefore higher future growth in dividends.
The market value is based on future expected dividends and therefore higher expected dividend growth leads to a higher share price and lower expected growth leads to a lower share price.
I explain this in my free lectures covering the valuation of securities.
(If you are looking for a study buddy then please post in the study buddy forum and not in this Ask the Tutor Forum)
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