Chapter 11 - Reporting and Interpreting Owners’ Equity
E11–17. Req. 1
Case 1: When companies unexpectedly announce increases in dividends, stock prices typically increase. Depending on course objective, the instructor may want to discuss research in finance concerning dividend policy.
Case 2: Stock price is based on expectations. If the increase in operating
performance was not expected, the stock price should increase. It is not necessary to increase dividends to have a favorable stock price reaction.
Case 3: Stock dividends do not provide any economic value but they may have a signal effect and are often associated with increases in cash dividends. As a result, stock dividends do not appear to directly cause an increase in stock price but are often associated with factors that do impact favorably on price.
Req.2
Stock prices react to underlying economic events and not changes in reporting methods, per se. Markets are relatively effective in recognizing the difference
between profits generated by operations and profits generated by the use of liberal accounting policies.