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dividend reinvestment plan puzzle: Theoretical and empirical evidence

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Date Issued:
1993
Summary:
This study examines the significance and implications of Dividend Reinvestment Plans (DRPs) for the sponsoring company and for the shareholders' wealth from a theoretical and an empirical point of view. It develops a DRP theory, as an extension of dividend and capital structure theories. Furthermore, the study tests empirically several hypotheses related to the market reaction at the announcement of a DRP adoption, to the market reaction at the announcement of a DRP discontinuance and to the performance of the company sponsoring a DRP. The results indicated that the market reaction to the announcement of a DRP establishment is favorable on days 1 and 2, significant only for the latter. In the long-run, DRPs create value for the sponsoring firm and its shareholders (as measured by Tobin's Q). The announcement of a DRP termination is followed by a negative market reaction, consistent with the thesis of this study. Finally, several factors such as the DRP type (Type I and Type II plans), the industry of the sponsoring company (utilities and non-utilities), tax legislation, the discount feature and the dividend payout ratio are examined in relation to the market reaction at the announcement of a DRP adoption. The Type II DRPs create more favorable reaction to Type I plans at the announcement of their introduction. There are significant differences between the market reaction at the DRP introduction of utilities and non-utilities. The tax legislation affects corporate dividend policy and DRPs. Finally, the discount feature is not regarded favorably by investors as it was hypothesized, which explains its elimination from many DRPs in the recent years.
Title: The dividend reinvestment plan puzzle: Theoretical and empirical evidence.
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Name(s): Lyroudi, Katerina.
Florida Atlantic University, Degree grantor
McDaniel, William R., Thesis advisor
Type of Resource: text
Genre: Electronic Thesis Or Dissertation
Date Issued: 1993
Publisher: Florida Atlantic University
Place of Publication: Boca Raton, Fla.
Physical Form: application/pdf
Extent: 173 p.
Language(s): English
Summary: This study examines the significance and implications of Dividend Reinvestment Plans (DRPs) for the sponsoring company and for the shareholders' wealth from a theoretical and an empirical point of view. It develops a DRP theory, as an extension of dividend and capital structure theories. Furthermore, the study tests empirically several hypotheses related to the market reaction at the announcement of a DRP adoption, to the market reaction at the announcement of a DRP discontinuance and to the performance of the company sponsoring a DRP. The results indicated that the market reaction to the announcement of a DRP establishment is favorable on days 1 and 2, significant only for the latter. In the long-run, DRPs create value for the sponsoring firm and its shareholders (as measured by Tobin's Q). The announcement of a DRP termination is followed by a negative market reaction, consistent with the thesis of this study. Finally, several factors such as the DRP type (Type I and Type II plans), the industry of the sponsoring company (utilities and non-utilities), tax legislation, the discount feature and the dividend payout ratio are examined in relation to the market reaction at the announcement of a DRP adoption. The Type II DRPs create more favorable reaction to Type I plans at the announcement of their introduction. There are significant differences between the market reaction at the DRP introduction of utilities and non-utilities. The tax legislation affects corporate dividend policy and DRPs. Finally, the discount feature is not regarded favorably by investors as it was hypothesized, which explains its elimination from many DRPs in the recent years.
Identifier: 12328 (digitool), FADT12328 (IID), fau:9230 (fedora)
Collection: FAU Electronic Theses and Dissertations Collection
Note(s): College of Business
Thesis (Ph.D.)--Florida Atlantic University, 1993.
Subject(s): Dividend reinvestment
Corporations--Finance
Investments
Portfolio management
Held by: Florida Atlantic University Libraries
Persistent Link to This Record: http://purl.flvc.org/fcla/dt/12328
Sublocation: Digital Library
Use and Reproduction: Copyright © is held by the author, with permission granted to Florida Atlantic University to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
Use and Reproduction: http://rightsstatements.org/vocab/InC/1.0/
Host Institution: FAU
Is Part of Series: Florida Atlantic University Digital Library Collections.