The shares of ABC, Inc., fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which one of the following explanations may explain investors' negative reaction?
A) Changes in regular cash dividends are made frequently so that the company's management can adjust for changes in short-term earnings. The decrease in the stock price is probably related to some other negative event.
B) Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it doesn't have enough positive-NPV projects to use all the money.
C) Investors expected that the company would announce a stock repurchase rather then a cash dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than a stock repurchase, the share price fell on the news of the dividend increase.
D) None of the above explanations can possibly explain investor's reaction.
Answer: B
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