The management of the corporation has to decide about how much of current earnings to pay ourt as dividends rather than to retain for reinvestment in the firm. Stock price is affected by dividend paid to stockholders from the firm's earning. It is also affected by the growth in EPS that results from re-investment of earning into the firm.
Thus stock price is also affected by the dividend policy adopted by a firm. A firm should follow optimal dividend policy that can maximize the market price of stocks.
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