Skip to main content
SpringerLink
Log in

Why firms adopt and discontinue new-issue dividend reinvestment plans

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

We examine several arguments—past performance, capital structure adjustment, and broadening the ownership base—involving why firms adopt and discontinue new-issue dividend reinvestment plans (DRPs). We test hypotheses for each argument by analyzing financial characteristics for firms adopting and discontinuing new-issue DRPs compared with matching non-DRP firms. The evidence provides some support for the past performance argument but none for the capital structure adjustment argument. Limited support also exists for the broadening the shareholder base argument. Overall, the results support the notion that firms needing funds initiate new-issue DRPs, and then discontinue them when the need for external funding diminishes.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • American Association of Individual Investors. 2001. “The Individual Investor's Guide to Dividend Reinvestment Plans”.AAII Journal 23: 16–35.

    Google Scholar 

  • Asquith, Paul, and David W. Mullins, Jr. 1986. “Equity Issues and Offering Dilution”.Journal of Financial Economics 15: 61–90.

    Article  Google Scholar 

  • Baker, H. Kent, and Martha C. Johnson. 1988a “Dividend Reinvestment Plans after Two Decades”.Financial Management 17: 7–8.

    Article  Google Scholar 

  • Baker, H. Kent, and Martha C. Johnson. 1988b. “Dividend Reinvestment Plans: A Survey of Current Practices”.Journal of the Midwest Finance Association 17: 37–49.

    Google Scholar 

  • Baker, H. Kent, and Sue E. Meeks. 1990. “The Evolution of Dividend Reinvestment Plans: 1968–1988”.Southern Business Review 16: 1–11.

    Google Scholar 

  • Baker, H. Kent, and William H. Seippel. 1980. “Dividend Reinvestment Plans Win Wide Currency.”Harvard Business Review 58: 182–186.

    Google Scholar 

  • Baker, H. Kent, and William H. Seippel. 1981. “The Use of Dividend Reinvestment Plans by Utilities”.Akron Business and Economic Review 12: 35–41.

    Google Scholar 

  • Barnea, Amir, Robert A. Haugen, and Lemma W. Senbet. 1981. “A Rationale for Debt Financing Under Cost Tax Arbitrage and Agency Problems”.Journal of Finance 36: 569–581.

    Article  Google Scholar 

  • Bierman, Jr., Harold. 2001.Increasing Shareholder Value: Distribution Policy, A Corporate Finance Challenge. Boston: Kluwer Academic Publishers.

    Google Scholar 

  • Chang, Otto H., and Donald R. Nichols. 1992. “Tax Incentives and Capital Structures: The Case of Dividend Reinvestment Plan”.Journal of Accounting Research 30: 109–125.

    Article  Google Scholar 

  • Dammon, Robert M., and Chester S. Spatt. 1992. “An Option-Theoretic Approach to the Valuation of Dividend Reinvestment and Voluntary Purchase Plans”.Journal of Finance 47: 331–348.

    Article  Google Scholar 

  • Damodaran, Aswath. 1999.Applied Corporate Finance. New York: John Wiley & Sons, Inc.

    Google Scholar 

  • Dubofsky, David A., and Leonard Bierman. 1988. “The Effect of Dividend Reinvestment Plan Announcements on Equity Value.”Akron Business and Economic Review 19: 58–68.

    Google Scholar 

  • Finnerty, John D. 1989. “New-issue Dividend Reinvestment Plans and the Cost of Equity Capital”.Journal of Business Research 18: 127–139.

    Article  Google Scholar 

  • Fredman, Albert J., and John R. Nichols. 1980. “New Capital Dividend Reinvestment Plans of Electric Utilities”.Public Utilities Fortnightly 105: 19–28.

    Google Scholar 

  • Gillan, Staurt L., and Laura T. Starks. 1998. “A Survey of Shareholder Activism: Motivation and Empirical Evidence”.Contemporary Finance Digest 2: 10–34.

    Google Scholar 

  • Hansen, Robert S., John M. Pinkerton, and Arthur J. Koewn. 1985. “On Dividend Reinvestment Plans: The Adoption Decision and Stockholder Wealth Effects”.Review of Business and Economic Research 20: 1–10.

    Google Scholar 

  • Hingorani, Vineeta L., and Tarun K. Mukherjee. 1994. “An Empirical Evaluation of the Implicit Option in Voluntary Purchase Plans.” Working Paper, University of New Orleans, Department of Finance and Economics.

  • Kao, Chihwa, and Chunchi Wu. 1990. “Sinking Funds and Agency Costs of Corporate Debt”.The Financial Review 25: 95–114.

    Article  Google Scholar 

  • Lease, Ronald C., Kose John, Avner Kalay, Uri Loewenstein, and Oded H. Sarig. 2000.Dividend Policy: Its Impact on Firm Value. Boston: Harvard Business School Press.

    Google Scholar 

  • Michal, Kenneth J. 1999. “Characteristics of Stocks with Dividend Reinvestment Plans”.AAII Journal 21: 28–32.

    Google Scholar 

  • Modigliani, Franco, and Merton H. Miller. 1958. “The Cost of Capital, Corporation Finance, and the Theory of Investment”.American Economic Review 48: 261–297.

    Google Scholar 

  • Modigliani, Franco, and Merton H. Miller. 1963. “Corporate Income Taxes and the Cost of Capital: A Correction”.American Economic Review 53: 433–443.

    Google Scholar 

  • Myers, Stewart C.. 1977. “Determinants of Corporate Borrowing”.Journal of Financial Economics 5: 147–175.

    Article  Google Scholar 

  • Myers, Stewart C., and Nicholas S. Majluf. 1984. “Corporate Financing and Investment Decisions When Firm Have Information That Investors Do Not Have”.Journal of Financial Economics 13: 187–221.

    Article  Google Scholar 

  • Ogden, Joseph P. 1994. “A Dividend Payment Effect in Stock Returns”.The Financial Review 29: 345–369.

    Article  Google Scholar 

  • Peterson, Pamela, David R. Peterson and Norman H. Moore. 1987. “The Adoption of New-issue Dividend Reinvestment Plans and Shareholder Wealth”.The Financial Review 22: 221–232.

    Article  Google Scholar 

  • Pettway, Richard H., and R. Phil Malone. 1973. “Automatic Dividend Reinvestment Plans of Nonfinancial Corporations”.Financial Management 2: 11–18.

    Article  Google Scholar 

  • Roden, Foster, and Tom Stripling. 1996. “Dividend Reinvestment Plans as Efficient Methods of Raising Equity Financing”.Review of Financial Economics 5: 91–100.

    Article  Google Scholar 

  • Scholes, Myron S., and Mark A. Wolfson. 1989. “Decentralized Investment Banking: The Case of Discount Dividend-Reinvestment Plans and Stock-Purchase Plans”.Journal of Financial Economics 24: 7–35.

    Article  Google Scholar 

  • Smith, Clifford W., Jr. 1977. “Alternative Methods for Raising Capital: Rights Versus Underwritten Offerings”.Journal, of Financial Economics 5: 273–307.

    Article  Google Scholar 

  • Steinhart, Paul John, and Zane Swanson. 1998. “No-Load' Dividend Reinvestment Plans”.Review of Financial Economics 7: 121–141.

    Article  Google Scholar 

  • Tamule, Harold B., Edward L. Bubnys, and Timothy F. Sugrue. 1993. “Dividend Reinvestment Plans and Pecking Order Capital Structure Behavior: An Empirical Investigation”.Journal of Economics and Finance 17: 91–102.

    Article  Google Scholar 

  • Tinic, Seha M. 1988. “Anatomy of Initial Public Offerings of Common Stock”.Journal of Finance 43: 789–822.

    Article  Google Scholar 

  • Todd, Janet M., and Dale L. Domain. 1997. “Participation Rates of Dividend Reinvestment Plans: Differences between Utility and Nonutility Plans.”Review of Financial Economics 6: 121–135.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics and Finance, University of New Orleans, 70148, New Orleans, LA

    Tarun K. Mukherjee

  2. Kogod School of Business, Department of Finance and Real Estate, American University, 4400 Massachusetts Avenue, NW, 20016-8044, Washington, D.C.

    H. Kent Baker

  3. Department of Economics and Finance, Southern University, 70813-2064, Baton Rouge, LA

    Vineeta L. Hingorani

Authors
  1. Tarun K. Mukherjee
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. H. Kent Baker
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Vineeta L. Hingorani
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

The authors wish to thank two anonymous referees and Joachim Zietz, the editor, for many constructive suggestions for the improvement of the paper. The authors take responsibility for any remaining errors.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Mukherjee, T.K., Baker, H.K. & Hingorani, V.L. Why firms adopt and discontinue new-issue dividend reinvestment plans. J Econ Finan 26, 284–296 (2002). https://doi.org/10.1007/BF02759712

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02759712

Keywords

Search

Navigation