Why Pay Dividends and Issue Equity Simultaneously? The Controlling Corporate Shareholders' View

Abstract

This paper proposes an explanation, according to a given investment policy and capital structure, for why some firms pay dividends and issue equity simultaneously. For individual investors, this combination invites additional taxes, wasteful flotation costs, and adverse selection. Within the framework presented herein, dividend policy is tailored for the median shareholder's personal consumption-optimum if the shareholder is dividend-seeking. As long as private benefits from saving taxes and transaction costs outweigh pro-rata costs of equity issue, controlling shareholders find it reasonable to receive positive dividends. They compel the firm to issue equity to finance profitable investment projects.