Which of the following statements is most correct?
According to the tax effect theory, investors prefer dividends and, as a result, the higher the payout ratio, the higher the value of the firm.
According to the dividend preference (bird-in-the-hand) theory, investors prefer cash to paper (stock), so if a company announces that it plans to repurchase some of its stock, this causes the price of the stock to increase.
According to the dividend irrelevance theory developed by Modigliani and Miller, stock dividends (but not cash dividends) are irrelevant because they “merely divide the pie into thinner slices.”
According to the information content, or signaling, hypothesis, the fact that stock prices generally increase when an increase in the dividend is announced demonstrates that investors prefer higher to lower payout ratios.
According to the textbook, the residual distribution policy is more appropriate for setting a company’s long-run target distributions than for determining the distribution on a year-to-year basis.