The correct answer is: C. Informational content.
Dividend policy is a company’s decision of how much of its profit to distribute to shareholders as dividends and how much to retain for reinvestment. The informational content of dividends refers to the fact that dividends can be used to signal to investors the company’s future prospects. A company that pays a high dividend is signaling that it believes it will be able to generate strong future cash flows, while a company that pays a low dividend is signaling that it is more conservative and is not confident in its ability to generate strong future cash flows.
Production capacity is the maximum amount of output that a company can produce in a given period of time. Change in management refers to the appointment of a new CEO or other senior management team. Debt service capacity refers to a company’s ability to repay its debt obligations.
While all of these factors can affect a company’s dividend policy, the informational content of dividends is the most important factor. This is because dividends are a direct cash flow to shareholders, and they are therefore a more reliable signal of a company’s future prospects than other factors, such as production capacity or change in management.