New issue dividend reinvestment plans and the cost of equity capital

Abstract

The cost of equity capital raised through new issue dividend reinvestment plans (NIDRPs) is greater than the cost of retention-financed equity capital but is less than the cost of stock-financed equity capital when shares are sold through the NIDRP at their market value. Selling shares through an NIDRP at a discount from market value results in a transfer of wealth from nonparticipants to participants, raises the cost of NIDRP-financed equity capital, and, when the discount becomes large enough, makes NIDRP-financed equity capital even more expensive than stock-financed equity capital.