According to the clientele effect, can a firm boost its share price by raising dividends?

Question

BlackTom AI · Accepted Answer

Let's parse the question and each option in turn to understand how the clientele effect works.
Option 1: 'Yes, investors will always respond to a high dividend.' This overstates the impact of dividends. The clientele effect suggests that different investor groups prefer different dividend policies; there isn’t a universal, automatic price increase simply from a higher dividend. So this is incorrect because it assumes a universal positive response, ignoring the heterogeneity of investor preferences.
Option 2: 'Yes, but only if an unsatisfied clientele exists.' This aligns with the core idea of the clientele effect: a firm can boost its price only if it can attract a satisfied, currently underserved group that prefers the new policy. If no such unsatisfied clientele exists, the price impact is unlikely. This statement correctly captures the conditional nature of the effect.
Option 3: 'No, investors are indifferent to dividend policy.' This contradicts the clientele theory, which posits that investors do care about dividend policy, and that different groups have distinct preferences. Saying investors are indifferent ignores the existence of these preference-driven demand differences.
Option 4: 'No, not according to the clientele effect.' This is asserting the opposite of what the clientele effect states. The clientele effect does imply potential price impacts under the right conditions, so this option is incorrect.
Taken together, the only option that coherently reflects the clientele effect is the one noting the conditionality on an unsatisfied clientele existing, since it explains when a dividend change could influence price rather than assuming universal or no impact.

According to the clientele effect, can a firm boost its share price by raising dividends?

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