Characteristics of Firms that Have an Underwritten Dividend Revinestment Plan: Australian Evidence

Abstract

This study examines the characteristics of firms that have an underwritten Dividend Reinvestment Plan (“UDRP”) under the dividend tax imputation system in the Australian equity market. An underwritten dividend reinvestment plan is a DRP in which the underwriter guarantees a set participation rate, that is, the underwriter offers to purchase sufficient shares at the issue price to reach the guaranteed participation level. UDRPs enable firms to increase and maintain a high dividend pay-out without depleting capital reserves. With an UDRP, a shareholder opting not to participate in the DRP will still receive their dividends in cash. However, in the event shareholders in aggregate do not choose to reinvest cash dividends in new shares at a minimum target level, new shares, equivalent to the value of that dividend, will be issued by the company to the underwriter. Thus, the underwriter for a fully underwritten DRP guarantees the firm that it can issue a minimum number of new shares to ensure the company retains the desired level of profits. Overall, the study provides empirical results that support the impact of taxation factors on the characteristics of firms that underwrite their DRP. There is some evidence that firms underwriting a DRP had a higher dividend yield and a lower franking yield, and that firms that underwrite their DRP are larger in size, have higher debt and lower liquidity than non-UDRP firms. There is also evidence to show that discount is related to the decision to underwrite a DRP.