Question 9.C-R-Q.3: It was mentioned in the chapter that the catering effect has...
It was mentioned in the chapter that the catering effect has been cited as a possible explanation as to why dividends seem to appear and then disappear from the financial landscape. Can you think of at least two other possible explanations for this phenomenon?
Other explanations for the phenomenon of appearing and disappearing dividends include following:
■ There may be a dearth of profitable opportunities for businesses. They may, therefore, decide to return funds to shareholders by paying a dividend. Conversely, when profitable opportunities abound, funds will be retained by businesses in order to exploit them. (This, of course, would be consistent with the MM view of dividends as being a residual.)
■ The characteristics of businesses may change over time. When there is an increased concentration of businesses in growth industries, for example, fewer dividends are likely to be paid.
■ During an economic downturn, poor profitability and cash flows may prevent, or restrict, businesses from paying dividends.
You may have thought of other explanations.