A discrete choice model of dividend reinvestment plans: classification and prediction

Abstract

We use a discrete choice recursive model to classify companies with and without dividend reinvestment plans (DRIPs). 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 a DRIP then we expect that it would be more likely to institute a plan than other companies in the sample. Our results support this conjecture. Companies that add DRIPs tend to have more extreme levels of variables that control for management entrenchment, higher levels of variables that control for the ability to pay dividends and higher payout ratios. Copyright © 2011 John Wiley & Sons, Ltd.