Question

Some researchers and analysts have noticed a trend in which firms that increase their dividends see an increase in their stock price. The theory of explains this phenomenon.

Answer 1

The theory which explains the phenomenon described in the question is referred to as "Dividend Signaling".

Step-by-step explanation:

When a company announces that is will be paying dividends, stock market players percieve this as an indication of :

1. Strenght
2. Performance and
3. Profitability.

Hence investors will find it more attractive to purchase such a stock.

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