Final answer:
Dividend payments can serve as a signal to shareholders about managers' expectations of the firm's future performance.
Step-by-step explanation:
Dividend payments can serve as a signal to shareholders about managers' expectations of the firm's future performance.
When a company pays regular and increasing dividends, it is seen as a sign of financial strength and confidence in the firm's future prospects. This can attract more investors, leading to an increase in the stock price.
On the other hand, if a company decreases or eliminates its dividend payments, it may indicate financial difficulties or a lack of confidence in the firm's future performance, which can cause the stock price to decline.