Which theory suggests dividend policy affects firm value?

Bird-in-the-Hand Theory suggests that investors prefer certain dividends today over uncertain future capital gains. According to this theory, firms that pay higher dividends are perceived as less risky and may therefore have a higher market value.

• Bird-in-the-Hand Theory: Dividend policy affects firm value.
• Dividend Irrelevance Theory (MM): Dividend policy does not affect firm value in a perfect market.
• Clientele Effect: Different investors prefer different dividend policies.
• Residual Dividend Theory: Dividends are paid only after funding profitable investment opportunities.

Therefore, the correct answer is: Bird-in-the-Hand Theory.