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Why Do Firms Issue Stock at a Discount? Dividend Reinvestment Plans: Shareholder Wealth and Capital Accumulation
- Article from:
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Journal of Global Business Issues
- Article date:
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April 1, 2008
- Author:
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Copyright informationCopyright Journal of Global Business Issues Spring 2008. Provided by ProQuest LLC. (Hide copyright information)
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A dividend reinvestment plan with a discount sells shares cheaper than the market and incurs costs and possible loss of value for the firm. The empirical evidence supports the hypothesis that investors in these companies temporarily earn negative returns consistent with an increase in costs and then earn positive abnormal returns over a longer time period. These returns are generated by two sources; one source is the increase in future profitable opportunities signaled by the firm and results in a persistent positive abnormal return. The other source occurs at the initial onset of the DRIP when investors see a slight decrease in the share prices over the first month. Firms with larger ...
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