Question

An investor who requires a 12% percent return for a stock that pays no dividends and requires a 9% return for a stock that pays its entire return from dividends is most likely a proponent of Select one:

a. the bird-in-the-hand dividend theory.
b. the clientele effect.
c. the information effect.
d. the residual dividend theory.

Answer 1

Answer: Option A

Explanation: In simple words, bird in the hand refers to the phenomenon under which a rational investor in the market prefers dividends over capital gains as capital gains are uncertain due to their heavy dependence on various other market factors.

Thus, these are the investors who are indifferent regarding the stock relation to the fact if the return is created out of capital gains or dividends. Therefore, such investors prefers high returns form stocks who do not provide regular dividends to the holders.