Informational Contents

Another reason for pursuing a stable dividend policy is that investors are dividends and changes in dividends as a source of information about the farm’s investors know that the firm will change dividends only if the management foresees restrings change, then the level of dividends informs investors about the company’s. Accordingly, the market views the changes in the, dividends of such a company as of a semi permanent nature. A cut in dividend implies poor earnings expectation no change, implies earnings stability and a dividend increase, signifies the management’s optimism about earnings. On the other hand, a company that pursues an erratic dividend payout policy does not provide any such information, thereby increasing the risk associated with the shares. Stability of dividends, where such dividends are based upon long run earning power of the company, is, therefore, a means of reducing share riskiness and consequently increasing share value to investors.

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