Which of the following statements is FALSE?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

The question asks which statement is FALSE. We will evaluate each option in turn to see whether it accurately reflects financial theory.
Option a: 'The idea that dividend changes reflect managers’ views about a firm’s future earnings prospect is called the signalling hypothesis.' This is a standard description of the signalling hypothesis in dividend policy: managers convey information about future earnings through changes in dividends. The reasoning aligns with conventional theory, so this statement is true.
Option b: 'In a perfect capital market, when a firm repurchases shares, the supply of shares is reduced, and at the same time, the value of the firm’s assets declines.' The first clause is correct: share repurchases reduce the number of shares outstanding (share supply). The second clause—'the value of the firm’s assets declines'—is consistent with the accounting effect of paying cash to buy back shares, which lowers the firm’s assets by the cash spent. In a perfect market, this cash outlay does not destroy value; it simply reallocates equity and uses assets; the asset base does decrease due to the cash outflow, so this statement can be interpreted as true in an accounting sense. Thus, this option is considered true in this context.
Option c: 'Homemade dividend refers to the process by which an investor, in a perfect capital market, chooses between equity and debt.' This is the incorrect description. A homemade dividend refers to an investor creating a cash payoff from their own portfolio by selling a portion of their stock to mimic a cash dividend, not choosing between equity and debt. Therefore, this statement misdefines the concept and is FALSE.
Option d: 'The practice of maintaining relatively constant dividends is called dividend smoothing.' This is a standard definition of dividend smoothing, describing the practice of keeping dividends steady over time. This statement is true.
In summary, option c contains the incorrect characterization of what a homemade dividend represents, while the other statements align with established concepts in dividend policy and market theory. The false statement is option c.

Which of the following statements is FALSE?[Fill in the blank]

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