A Discrete Choice Model of Dividend Reinvestment Plans: Classification and Prediction

Abstract

We use a discrete choice recursive model to classify 629 companies with dividend reinvestment plans (DRIPs) in 1999 and 514 companies without them. Our model classifies 72.0% of companies correctly. We interpret misclassified companies as being likely to switch their plan status. For example, if financial data erroneously suggest that a company should have had a DRIP in 1999, then we expect that it would be more likely to institute a plan than other companies in the sample. Data from 2004 support this conjecture for firms that add DRIPs. Companies that add DRIPs tend to have higher levels of variables that control for management entrenchment except for common shares outstanding which tend to be lower, higher levels of variables that control for the ability to pay dividends and higher payout ratios. Other factors that impact the likelihood of a company having a DRIP include industry effects and the exchange on which the company’s shares are traded..