Answer to Question #13631 in Management for Tiarra Jefferson

Question

Which of the following statements about dividends policies is correct? Modigliani and Millerargue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the bird in the hand effect.

Answer 1

False.It is not Modigliani-Miller theory. Bird-in-the-hand theory was criticised by Modigliani and Miller who claimed that dividend policy does not affect the firm's cost of capital and that investors are totally indifferent if they receive more dividend or capital gains. The authors of bird-in-the hand theory are Myron Gordon and John Lintner