Dividend Reinvestment Plans Research Articles

Corporate Governance and Dividend Reinvestment Plans: Insights from Imputation Tax in Australia

This paper investigates the supply of Dividend Reinvestment Plans (DRPs) in relation to corporate governance and imputation tax system in Australia. Since DRPs are popular among large firms, we compiled the data of 300 largest companies listed on the Australian stock exchange (ASX300) during 2001-2013. Tobit regression method is used to estimate the models. Results indicate that good corporate governance leads to the higher supply of DRPs. We also found that franked dividend and heavily discounted DRPs weaken the positive association between governance and DRPs, illustrating the importance of institutional settings. Our findings imply that good corporate governance should consider a variety of clientele demands for dividend policy.

Elective stock and scrip dividends

We investigate firms' decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms' cash-preservation motives.

Equity Financing, Equity Lending, and Price Pressure: The Case of DRIP Arbitrage

Dividend reinvestment plans (DRIPs) with discount offer shareholders the choice between receiving cash dividends or additional shares at a discount. We provide evidence on DRIP arbitrage where DRIP arbitrageurs extract the DRIP discount through short-term equity borrowing. We show the relation between equity lending, equity financing, and stock returns through DRIP arbitrage. DRIP arbitrage increases search costs in the equity lending market and creates negative price pressure in the stock market around dividend dates. Restrictions on equity lending impede DRIP arbitrage and negatively affect equity financing. Our results are more pronounced when the demand for DRIP arbitrage is higher.

Underwriting of Australian Dividend Reinvestment Plans

This study examines the decision to underwrite dividend reinvestment plans (DRPs) by Australian listed firms over the sample period 1995–2013. We find that the decision to underwrite a DRP for non-financial firms is negatively related to the level of franking credits attached to dividends, but positively related to the leverage of the firm and the discount for new shares issued in lieu of dividends. Non-financial and financial firms that are larger in size are more likely to underwrite their DRP. Lastly, underwriting of DRPs decreased with the onset of and subsequent to the height of the global financial crisis.

Elective Stock and Scrip Dividends

We investigate firms’ decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms’ cash-preservation motives.

The Impact of Dividend Reinvestment Plans on Firm Payout Choices—Evidence from Real Estate Investment Trusts

AbstractThis study investigates whether firm dividend payout choices are influenced by the presence of a Dividend Reinvestment Plan (DRIP). Given that DRIPs help retain capital, we show that dividend‐paying firms with a DRIP will tend to pay a high dividend and maintain a stable payout policy. Using a multinomial logistic model, we show that in comparison to REITs without DRIPs, REITs with DRIPs have a higher payout ratio and are less likely to: (1) pay regular dividends with extra dividends and share repurchases, (2) distribute extra dividends, repurchase shares, yet omit regular dividends and (3) omit all payouts. In addition, we find that REITs with a capital‐retaining DRIP invest more aggressively and such increased investment activities are undertaken without raising the reliance on external financing.

Elective Stock and Scrip Dividends

We investigate firms' decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms' cash-preservation motives. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstra (This abstract was borrowed from another version of this item.)

Financial Independence Through Dollar Cost Averaging and Dividend Reinvestments

This paper describes how to achieve financial independence by using the Dividend Reinvestment Plan (DRIP) in conjunction with dollar cost averaging to purchase stocks of quality companies, paying increasing dividends. The formula derived in this paper uses historical data over the 15 year period from 1993 – 2007 to compute returns.

DRIPs and the Dividend Pay Date Effect

On the day that dividends are paid, we find a significant positive mean abnormal return that is completely reversed over the following days. This dividend pay date effect has strengthened since the 1970s and is consistent with the temporary price pressure hypothesis. The pay date effect is concentrated among stocks with dividend reinvestment plans (DRIPs) and is larger for stocks with a higher dividend yield, greater DRIP participation, and greater limits to arbitrage. Over time, profits from a trading strategy that exploits this behavior are positively related to the dividend yield and spread and negatively associated with aggregate liquidity.

Underwritten Dividend Reinvestment Plans and Conflicts of Interest

AbstractWe examine conflicts of interests arising from the pricing of seasoned equity offerings (SEOs) in underwritten dividend reinvestment plans (DRIPs). A DRIP is a type of SEO that enables shareholders automatically to reinvest their dividend entitlements in the issuing company's shares. The underwriters have an incentive to sell stock during the DRIP pricing period in order to hedge price risk and/or to reduce the price at which shares are issued. Using individual brokers’ transactions, we show that underwriting brokers engage in an abnormally high level of selling during the issue pricing period. Comparison of pricing period returns between stocks with underwritten DRIPs and a matched sample of non‐underwritten DRIPs shows that significantly more negative returns accrue to firms that have their issues underwritten.

Dividend Reinvestment Plans: A Tax-Based Incentive Under the Australian Imputation Tax System

An innovative feature of the Australian tax code is the provision of tax credits that reduce the effective tax paid by Australian investors on dividends received from Australian firms. The feature is generally regarded as providing a tax incentive for corporations or firms subject to Australian corporate tax to distribute available cash to investors rather than seeking to retain the firm’s profits. More recently in Australia, dividend reinvestment plans (DRPs) have been increasingly utilised by firms that allow investors to have their cash dividends automatically reinvested in new shares issued by the firm. Such plans offer firms an alternative source of equity capital to either retention- or stock-financed equity capital. This article demonstrates the link between the tax liabilities of investors and the propensity of firms to avail themselves of a DRP innovation. We argue that the increasing use of DRPs in the Australian equity market subsequent to the introduction of the imputation tax system can be explained by tax-saving efficiencies that allow the firm the opportunity to lower its cost of financial capital. From a policy perspective, this will act to stimulate overall investment.

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

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.

A Longitudinal Study of Possible Links between Tax Imputation and Dividend Reinvestment Plans: Australian Evidence

This study focuses on the relationship between dividend payout ratio and DRP (Dividend Reinvestment Plan) adoption within the framework of the Australian dividend tax imputation system. Since the decision to adopt the DRP (Dividend Reinvestment Plan) is effected through the distribution of dividends, a longitudinal study of dividend payout ratios and DRP adoptions over time during the sample period (1995-2009), places the DRP decision in the right perspective. We also look at the DRP effect on certain firm characteristics over time using cross-sectional longitudinal data. The study addresses the binary longitudinal data analysis, using the trend and GEE (General Estimating Equation) approaches, to examine the DRP effect on dividend payout ratio and other firm characteristics. The results of both the trend analysis and GEE approach indicate that DRP decisions are prompted by high dividend payout ratio, low profitability and low liquidity over time. The highly significant time coefficient in GEE estimates shows the longitudinal effect on the DRP decision.

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

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.

Drained by DRIPS: The Hidden Cost of Buying on the Dividend Pay Date

On the day that dividends are paid we find a significant positive mean abnormal return that is completely reversed over the following days. This dividend pay date effect has strengthened since the 1970s, and is consistent with the temporary price pressure hypothesis. The pay date effect is concentrated among stocks with dividend reinvestment plans (DRIPs), and is larger for stocks with a higher dividend yield, greater DRIP participation, and greater limits to arbitrage. Over time, profits from a trading strategy that exploits this behavior are positively related to the dividend yield and spread, and negatively associated with aggregate liquidity.

Determinants of a Firm's Decision to Adopt a Dividend Reinvestment Plan: Australian Evidence

A Dividend Reinvestment Plan (DRP) allows firms to increase their dividend payout and, at the same time, enables managers to retain cash in the firm for new investment opportunities. We examine the determinants of a firm's decision to adopt a DRP under the Australian dividend imputation regime over the sample period 1995-2009. Dividend imputation substantially reduces any tax advantage to debt and encourages firms to distribute franked dividends to Australian tax-resident shareholders. Reforms to Australia's tax system in July 2000 also allowed Australian individual, superannuation and pension fund investors to claim back from the Australian Tax Office the value of any surplus franking credits distributed to shareholders. Overall, we find evidence to support the role of taxation of equity income in the determination of a firm's dividend policy. Firms adopting a DRP had a higher dividend payout ratio compared to non-DRP firms and were also more likely to adopt a DRP subsequent to the July 2000 tax reforms. There was also some evidence that DRP firms paid dividends with higher levels of franking credits, particularly in the post-tax 2000 reform period.

Repurchase Dividend Reinvestment Plans (Repurchase DRIPS)

<p class="MsoBodyTextIndent" style="text-align: justify; line-height: normal; text-indent: 0in; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt;">We investigate the determinants of firms' decision to offer </span><span style="font-size: 10pt; mso-fareast-language: KO;">Repurchase </span><span style="font-size: 10pt;">Dividend Reinvestment Plans (</span><span style="font-size: 10pt; mso-fareast-language: KO;">Repurchase </span><span style="font-size: 10pt;">DRIPs). </span><span style="font-size: 10pt; mso-fareast-language: KO;">F</span><span style="font-size: 10pt;">irm size, managerial share holding, and </span><span style="font-size: 10pt; mso-fareast-language: KO;">free cash flow</span><span style="font-size: 10pt;"> are statistically significant in explaining a firm’s </span><span style="font-size: 10pt; mso-fareast-language: KO;">decision to employ</span><span style="font-size: 10pt;"> </span><span style="font-size: 10pt; mso-fareast-language: KO;">Repurchase </span><span style="font-size: 10pt;">DRIPs.<span style="mso-spacerun: yes;">  </span></span><span style="font-size: 10pt; mso-fareast-language: KO;">We find</span><span style="font-size: 10pt;"> that managerial stock ownership </span><span style="font-size: 10pt; mso-fareast-language: KO;">is negatively related to use of Repurchase </span><span style="font-size: 10pt;">DRIPs</span><span style="font-size: 10pt; mso-fareast-language: KO;">. E</span><span style="font-size: 10pt;">conomies of scale in marketing and maintaining DRIP</span><span style="font-size: 10pt; mso-fareast-language: KO;"> program </span><span style="font-size: 10pt;">and </span><span style="font-size: 10pt; mso-fareast-language: KO;">excess cash flows</span><span style="font-size: 10pt;"> are</span><span style="font-size: 10pt; mso-fareast-language: KO;"> positively related to Repurchase </span><span style="font-size: 10pt;">DRIP adoption.<span style="mso-spacerun: yes;">  </span></span><span style="font-size: 10pt; mso-fareast-language: KO;">We find no evidence that information asymmetry is a major motivation to the likelihoods of using Repurchase </span><span style="font-size: 10pt;">DRIPs</span><span style="font-size: 10pt; mso-fareast-language: KO;">.</span></span></p>

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

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.

The Impact of a Firm's Payout Policy on Stock Prices and Shareholders' Wealth in an Inefficient Market

Recent literature has almost exclusively focused on the announcement effects of payout policy. However, in an inefficient stock market payout policy may not only affect stock prices at the announcement date but also at the payment date. Our theoretical approach is based on the rational demand of risk averse investors and passive investors holding shares in a firm which may or may not pay out free cash flow. The joint existence of both investor types in an inefficient market may lead to a positive impact at the payment date. We predict a positive effect for a share buyback and a dividend payment that is associated with reinvestment, e.g. via a dividend reinvestment plan (DRIP). This price impact affects shareholders' current and long run net wealth. Both buyback and divi-dend with DRIP cause a wealth transfer between smart and passive investors in the long run, with the direction of the wealth transfer depending on the level of the firm's market valuation relatively to expected future value.

Web Site & Dividend Reinvestment Plan Information

Mergent's Dividend AchieversVolume 5, Issue 3 p. 20a-25a U.S. Dividend Achievers Web Site & Dividend Reinvestment Plan Information† First published: 14 July 2008 https://doi.org/10.1002/div.7259Citations: 1 † Contact: : Address: : Web Site: : AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume5, Issue3Summer 2008Pages 20a-25a RelatedInformation