Final answer:
According to the clientele effect, a firm cannot directly boost its share price by raising dividends. The impact of raising dividends on the share price depends on the preferences of the investors in the market.
Step-by-step explanation:
According to the clientele effect, a firm cannot directly boost its share price by raising dividends. The clientele effect suggests that different investors have different preferences for receiving returns on their investments. Some investors prefer receiving income through dividends, while others prefer capital gains. When a firm increases its dividends, it may attract income-seeking investors, but it may also discourage investors who are seeking capital appreciation. As a result, the overall impact on the share price may not be significant.
For example, if a firm raises its dividends, income-seeking investors may be interested in buying the stock, driving up the demand and potentially increasing the share price. However, investors seeking capital gains may be less interested in the stock, reducing the demand and potentially lowering the share price. Therefore, the impact of raising dividends on the share price depends on the preferences of the investors in the market.
In summary, while raising dividends may attract certain types of investors, it does not guarantee a boost in share price due to the clientele effect.