CFA Practice Question

There are 131 practice questions for this study session.

CFA Practice Question

Which of the following statements is false?

A. Firm managers typically have better information about the firm than the firm's investors.
B. Dividends convey no information about the earnings prospects of the firm because any firm can increase its dividend payments if it so chooses.
C. The dividend decision is often an important managerial tool. According to the dividend signaling hypothesis, dividend changes provide an effective way for management to convey believable information to the market about the firm's expected future cash flows.
Correct Answer: B

Managers typically have better information about the earnings prospects of the firm than do investors. This is called asymmetric information. Managers have difficulty conveying that information to investors because as the old saying goes, "talk is cheap." In order to convey believable information to investors, management must send a message that is costly. According to the dividend signaling theory, dividend increases are a costly signal that must be supported by the earnings prospects for the firm. As such increases in dividends send a positive signal to the market about the future earnings prospects.

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