ACCA Advanced Financial Management (AFM) Practice Exam

Which psychological factor affects organizations' reliance on dividends?

1. Risk assessment

2. Investment strategy

3. Steady income reliance

4. Market speculation

The correct answer is: Steady income reliance

The correct answer, which highlights the importance of steady income reliance, reflects a significant psychological factor in organizational behavior towards dividends. Organizations often prioritize dividends because they represent a reliable source of income for shareholders, who may depend on these distributions for regular cash flow. This reliance on dividends can create a sense of stability and predictability in financial management, making organizations favor a consistent dividend policy particularly during economic uncertainties or volatility in capital markets. Establishing a track record of steady dividends also affects investor perceptions, as it signals financial health and management's commitment to returning value to shareholders. Companies that maintain or grow their dividend payouts tend to build trust and attract investors who favor income-generating investments, thus reinforcing their market position. While risk assessment, investment strategy, and market speculation are relevant considerations in a broader financial context, they do not directly address the psychological comfort and predictability that steady dividend payouts provide to both organizations and their investors. Focusing on a reliable income stream aligns with the psychological needs of shareholders, which in turn influences organizational policies around dividend distributions.