How does Jensen’s free cash flow hypothesis relate to a firm’s dividend policy?
a. Dividends discipline management by forcing free cash flow to be disgorged to shareholders, thus mitigating management’s tendency to engage in empire building.
b. Dividends act as a signal of firm value.
c. Dividends solve the principal-agent problem between shareholders and creditors.
d. Dividends solve the underinvestment problem.
ANSWER
A
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