When investors increase their demand for dividend-paying stocks and those stocks

Question

When investors increase their demand for dividend-paying stocks and those stocks become more popular, do managers increase the amount of dividends?

Is it possible that firms that have not paid dividends in the past exhibit a greater propensity to pay dividends when the demand for dividends goes up?

If investors are overly optimistic about a firm, are managers more likely to issue more equity?

How corporate managers exploit market inefficiencies to make better firm-level decisions.

How corporate managers exploit market inefficiencies. How could they improve their decisions?

How can you exploit market inefficiencies to make better firm-level decisions.

Explanation / Answer

When investors increase their demand for dividend-paying stocks and those stocks become more popular, do managers increase the amount of dividends?

The amount payed out as dividends depends upon ability of the firm to invest in positive NPV projects. If these projects are available firm would rather plowback earnings into these projects rather than paying out as dividend. However from a manager's perspective, their compensation is many times tied to stock price, and if they do not increase dividends investors are likely to not keep this stock. Thus managers are likely to increase dividends.

Is it possible that firms that have not paid dividends in the past exhibit a greater propensity to pay dividends when the demand for dividends goes up?

If firm has high postive NPV project investment the firm is likely to retain earnings than to give it out as dividends. The fact that they have not paid dividends implies that they have positive NPV projects on hand.

If investors are overly optimistic about a firm, are managers more likely to issue more equity?

Yes because they can issue the stock and receive greater proceeds from stock sale and thus greater funds/capital made available to them

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