Determinants of a firm's decision to utilize a dividend reinvestment plan and shareholder participation rates: Australian evidence

Abstract

This study examines the determinants of a firm's decision to utilize a dividend reinvestment plan (“DRP”) and shareholder participation rates under the Australian dividend imputation regime over the period 1995–2009. A DRP enables managers to increase the dividend payout and distribute greater franking credits to Australian tax-resident shareholders, while retaining cash in the firm for new investment opportunities.Overall, we find evidence that firms who utilize a DRP have a higher dividend payout ratio, are larger in size and lower growth prospects compared to non-DRP firms. Firms were more likely to utilize a DRP subsequent to reforms to Australia's tax system in July 2000, which enabled Australian tax-resident investors to redeem for cash the value of any surplus franking credits distributed to shareholders. For financial firms we find that firms who utilize a DRP pay dividends with greater levels of franking credits attached.Shareholder participation rates in non-underwritten DRPs are positively related to the discount offered in respect of the issue of new shares. Contrary to our expectations, we find no evidence that dividend taxation explains participation rates in a DRP.