Final answer:
The effect of a dividend cut announcement on a firm's share price may be negligible if shareholders already expected or knew about it. Stock prices reflect future expectations, and when these expectations are already accounted for by the market, the actual announcement has minimal impact. Investors seek to forecast these expectations and invest in companies with the potential for significant future gains.
Step-by-step explanation:
If a dividend cut conveys information to shareholders that they already expected or knew, then the effect of the announcement of the dividend cut on the firm's share price may be negligible. This is because stock prices are largely based on expectations about the future, and for an efficient market, the information would already be factored into the stock's price. When expectations shift, they can alter stock prices significantly. However, if a dividend cut was already anticipated by investors due to prior knowledge or analysis, there would likely be little to no surprise, resulting in a negligible change in stock price.
Furthermore, investors are continuously seeking companies that they believe will outperform current market expectations. Investment research, carried out by a brigade of stock market analysts and individual investors 24 hours a day, aims to find companies believed to have poor prospects at present, but that will turn out to be highly successful in the future. These findings can significantly influence stock prices and investor behavior.
The return to investors comes in two forms: through direct payments like dividends or through capital gains. Therefore, whether a stock does well in the future also depends on these both factors and not solely on the company's ability to generate future profits.