The interest tax shield and the costs of financial distress. The tradeoff between the value of signaling and the cost of additional taxes. An increase in dividends may increase firm value when a. Shareholders can undo any dividend policy through homemade dividends. There are clienteles for high dividend paying stocks. The firm is paying a liquidating dividend.
Shareholders face higher tax rates on dividend income than on capital gains income.
The increase provides the market with a signal regarding the managers confidence in future cash flow. The stock price remains the same. The stock price increases by the amount of the dividend. The stock drops by the amount of the dividend. The stock price gyrates wildly.