Do Investors Prefer Dividends or Capital Gains? Explain

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The Answer is There is no definitive answer to this question, as different researchers have concluded different things. According to Gordon and Lintner, investors prefer dividends to capital gains because there is less uncertainty regarding dividends received now than there is for possible future capital gains. However, Modigliani and Miller called this the "bird-in-the-hand" fallacy and argued that the cost of common equity is independent of dividend policy. MM argued that what mattered was a firm's basic earning power and business risk and dividend policy was irrelevant. In addition, some have proposed that there is a tax preference reason for preferring capital gains over dividends. For years, dividends were taxed at high personal tax rates. As a result, some concluded that investors preferred capital gains which occurred in the future and were taxed at lower rates. In 2003, tax rates on dividends were lowered to the capital gains tax rate but the deferment of taxes is still valid.

Do Investors Prefer Dividends or Capital Gains? Explain

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Do Investors Prefer Dividends or Capital Gains? Explain

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Correct Answer:
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