Dividend Policy and Increasing Discount Rates: A Clarification

Abstract

For almost a decade, Myron Gordon has argued repeatedly that an enterprise's dividend policy can affect its share price [2, 3, and 4]. The essence of his argument is that risk-averse investors are likely to perceive current dividends as less risky than future ones. Consequently, a corporate decision to reduce current, in favor of increased future, dividends will reduce share prices, even when the funds are invested to yield the firm's cost of capital.