Download Factors that influence the decision of a firm to offer a - UvA-DARE

University of Amsterdam
Amsterdam Business School
Factors that influence the decision of a firm to offer a
Dividend Reinvestment Plan
Student: Rosalie Turk
Student number: 6177611
Supervisor: Dr. Torsten Jochem
Abstract
Dividend reinvestment plans provide investors with the option to receive their dividends in
the form of shares instead of cash. In this study, it is researched which firm characteristics
influence the likelihood that businesses offer a DRIP. Data covering the period 2003-2012 is
used to test various hypotheses regarding potential firm specific factors that could influence
DRIP usage. Both univariate mean-difference analyses and multivariate linear probability
models are used to test the hypotheses.
In the univariate analyses various findings provide evidence that DRIP firms are more
financially constrained, larger in size, more illiquid and are considerably more highly
leveraged. Also, the fraction of insiders in the shareholder base of firms was lower and the
fraction of institutional investors noticeably higher. The findings were mixed concerning the
volatility of the stock of DRIP offering businesses, their growth opportunities and profitability.
The linear probability models also provided some support that more leveraged firms, as
well as businesses with a larger share of institutional shareholdings and a lower percentage of
insider ownership, were more likely to offer a DRIP. These outcomes were as hypothesized.
However, contrary to what was hypothesized, strong evidence was found that dividend-paying
firms with more growth opportunities are less likely to offer a DRIP. Moreover, some
findings show that the higher the return on assets ratio and the net profit margin of a company,
the more likely the firm is to offer a DRIP. This indicates that the profitability of a firm can
positively affect DRIP usage, which is opposed to what was hypothesized.
It is also shown in this study that companies are more likely to offer a DRIP during a
financial crisis. The average number of DRIP offering businesses increased from 12% to 15%
when comparing DRIP usage in the pre-crisis period (2003-2006) to the recent financial crisis
period (2007-2009). The multivariate analyses confirmed that the likelihood that a business
offers a DRIP is increased during crisis times.
Lastly, in this study also strong evidence is provided that firm characteristics can
impact the likelihood that DRIP firms offer its investors specific DRIP features. The findings
indicate that there is significant heterogeneity among the firms that offer DRIPs.
Table of contents
1. Introduction................................................................................................................. 4
2. Literature Review and Economic Background………............................................. 6
2.1 Advantages of DRIPs……………………………………………....…………..... 6
2.1.1 DRIPs as an equity raising mechanism……..………………………....... 7
2.1.2 DRIPs’ ability to signal a managements’ forecasts…………………...... 11
2.1.3 Improving shareholder relations………………………………………... 11
2.1.4 Reducing volatility……………………………………………………… 12
2.1.5 Broadening the shareholder base……………………………………….. 13
2.2 Disadvantages of DRIPs……………………...…………………………………. 13
2.2.1 Reduced market disciplining…………………………………………… 14
2.2.2 Earnings per share dilution……………………………………………... 15
2.2.3 Free cash flow problems …………………………...………………...… 15
2.3 Market reaction to DRIP announcements………………………………..……....16
2.4 Working capital management literature .. …………….………………………....17
2.5 Financial constraints literature………………………………………………….. 19
3. Hypothesis development…………………………………………………………....20
3.1 Hypotheses concerning the firm-characteristics of DRIP firms ………………….… 21
3.2 Hypotheses concerning DRIP features….………………………………….………. 27
4. Data collection……………………………………………………………………... 29
5. Results ……………………………………………………………..……………..... 34
5.1 Summary statistics………………………………………………………………….. 34
5.2 Univariate analysis; DRIP firms vs. non-DRIP firms………………………...……. 35
5.3 Univariate analysis; subsamples…………………………………………………… 37
5.4 Multivariate analysis; DRIP usage………………………………..………………… 40
5.5 Multivariate analysis; DRIP features…………………………….…………………. 43
6. Conclusion………………………………………………..……………………….. 46
7. Recommendations……………………………………………………………….... 48
8. Reference list…………………………………………………………...…………. 49
9. Appendix…………………………………………………………………………... 55
1. Introduction
With a Dividend Reinvestment Plan (DRIP), a firm provides its shareholders with the
possibility to routinely reinvest their dividends in order to acquire extra shares of stock.
Usually a discount is offered to participants, which implies that the shares are reinvested
against a lower price than the spot rate. Moreover, transaction costs are often much lower
than when stocks are purchased through a traditional broker. In addition, many firms also
offer participants the option to purchase shares in excess of the dividend amount up to a
specified maximum (Eckbo and Masulis, 1992). Other businesses allow the partial
reinvestment of dividends and some businesses offer the direct investment option, which
implies that initial shares can be bought directly from the firm instead of via a broker. These
specific DRIP features make it beneficial for investors to participate in the plan and also
indicate that DRIPs can offer repeated benefits to participants.
There are three different categories of DRIPs. With a new-issue DRIP, a company
issues new shares or provides shares from its treasury stock. New-issue DRIPs are
therefore a low-cost way for the firm to raise capital since the dividends paid to the
participants do not require cash outflows and consequently these plans enable firms to retain
funds (Bierman and Dubofsky, 1988). In addition, the plans offer firms access to external
capital at a lower cost, because the company takes on the role of investment bank. Firms
can use a DRIP in order to issue new equity periodically, thereby avoiding the traditional
costs of using an investment bank to underwrite the share issue (Cherin and Hanson, 1995).
Market DRIPs, on the other hand, are not used to raise capital; instead, with these plans,
shares are bought on the market. Firms can also implement a combined DRIP in which shares
are both purchased on the market and are newly issued.
DRIPs have been offered by firms since the 1950s and since their initiation their
popularity has increased substantially (Cherin and Hanson, 1995). By 2010, more than 2000
companies offered a dividend reinvestment plan in the US (Mayo, 2010). However, the fact
that not all companies offer investors the option to participate in a DRIP can imply that there
are certain firm-specific characteristics that might affect whether a company chooses to offer
a DRIP. The aim of the research is therefore to answer the research question:
What determines the likelihood that companies adopt Dividend Reinvestment Plans (DRIPs)
and how do DRIP and non-DRIP firms differ during normal and financially distressed times?
Because it can be expected that DRIPs are an appealing instrument for businesses that
experience problems with obtaining external funds, it will specifically be researched whether
companies that are more financially constrained tend to implement DRIPs more often. The
degree of financial constraints encountered by firms is therefore an important company
characteristic that will be used in this paper with the aim of investigating whether DRIP
implementation differs among certain types of companies. Most literature concerning
financial constraints has concentrated on the influence of constraints on the investments
made by a company and the ability of a business to save cash out of its cash flows (Fazzari et
al., 1998). This paper will be a contribution to the existing literature because no research
about the possible relationship between financing constraints and the implementation of
dividend reinvestment plans has been performed to date.
Other firm characteristics that will be investigated are the growth opportunities of a
firm, its debt level, payout ratio, liquidity, profitability, the volatility of its stock, the size of
the firm and the share of institutional and insider investors. There is previous, albeit limited,
research performed on how specific firm characteristics influence the decision of a company
to offer a DRIP. However, to date no research about this form of payout policy has been
performed concerning the recent financial crises. Moreover, in none of the existing papers a
specific comparison has been made between normal times and times of financial distress. The
latest financial crisis provides an especially interesting setting to study how DRIP and nonDRIP firms differ because firms' ability to access capital markets is substantially reduced
during periods of financial distress. The second contribution to the literature is therefore
that in this paper a sample period is used which covers both normal times and times of
financial instability. Unlike the studies by Boehm and DeGennaro (2007) who investigated
which types of firms adopt DRIPs for 1999 and 2004, and Mukherjee et al. (2002) who
researched DRIP adoption based on data from 1983 and 1992, the sample period in this paper
is from 2003 to 2012. Because this period spans the global financial crisis, it is possible to
study whether differences in macroeconomic conditions affect DRIP offerings.
Furthermore, this will be the first study in which it will be specifically investigated
whether the usage of specific DRIP features differs among various types of firms and when
comparing normal and financially distressed times. Firms can for example try to attract a
greater number of participants or try to raise a larger amount of funds by offering a
discount, by offering investors the option to receive their dividends partially in shares or by
enabling them to invest additional amounts through the plan.
An introduction to the research subject central in this study has now been given. The
other sections of paper are arranged in the following way; in section 2, the previous literature
that is related to this study will be examined. In part 3, the hypotheses that will be tested in
this paper will be presented. In section 4, a description of the data gathering and the sample
construction will be offered. In section 5, the empirical findings will be reviewed. In the last
part of the paper, section 6, the results will be summarized and a conclusion will be given.
2. Literature Review and Economic Background
Modigliani and Miller (1961) claimed that the capital structure of a business has no impact on
its overall value in perfect capital markets with symmetrical information and with no
transaction costs and taxes. This implies that the dividend policy of a business is irrelevant.
The dividends paid by a firm should have no impact on shareholders’ wealth because the
larger the dividend the smaller is the amount the stockholders receive in the form of capital
appreciation. Consequently, because dividends and capital gains can be used as perfect
substitutes, stockholders who do have specific dividend preferences can use them to suit their
demands. For example, investors that are in need of cash and consider the dividend payments
insufficient can decide to realize some capital gains by selling stock. According to the
irrelevance theorem, there is no optimal dividend policy and accordingly, the implementation
of a DRIP should have no impact on the value of a business. However, in reality the
restrictive assumptions of the irrelevance theorem do not hold. Because markets are in reality
imperfect and not efficient, the decisions the firm takes concerning its financing can affect the
value of the business. In the first section of the literature review, the main economic motives
for the adoption of DRIPs will be provided. The potential disadvantages concerning the plans
will be reviewed in the second section of the literature review. Various event studies have
been performed to investigate the effect of a DRIP announcement on shareholders’ wealth. In
the third section, the mixed outcomes of these papers will be provided and the explanations
provided by the authors will be summarized. Subsequently, in the fourth section, literature
concerning financial constraints will be presented. Finally, in section five, the relevant
literature on the implications of the financial crisis will be provided.
2.1 Advantages of DRIPs
In the following section first the advantages associated with DRIP adoptions that have been
stated in the literature concerning DRIPs will be discussed. These advantages can explain why
markets can react positively to DRIP announcements. They can be broadly grouped into
agency-concerned advantages where DRIPs can be used to minimize agency problems and
economic reasons where DRIPs can be used in order to save costs.
2.1.1 DRIPs as an equity raising mechanism
To finance investment opportunities businesses have the option to either use their internally
generated funds or to make use of external sources such as issuing equity or debt. The pecking
order theory founded by Myers and Majluf in 1984 argues that with inefficient and imperfect
markets, the capital structure is important for companies and firms therefore have distinct
preferences concerning their sources of financing. The theory argues that due to differences in
costs between the different ways to raise equity that arise from asymmetric information
between managers and shareholders, firms have the preference of financing their investments
primarily with earnings which they have retained in the firm, subsequently with relatively low
risk debt, then with riskier forms of debt and only as a ultimate source with external equity
(Myers and Majluf, 1984).
There are various reasons why the use of external financing is costly for a business.
Firms have to incur transaction costs for the equity issue and because arranging a public
offering takes some time, the funds are not always readily available. However, a main
disadvantage of using equity is the existence of information asymmetries. The reluctance of
businesses to use equity financing predominantly stems from asymmetric information
problems that exist among the people who manage a business and who invest in the firm.
Because only the managers know the true condition and accurate value of a business,
investors on average interpret the occurrence of an equity issue as providing negative
information because they believe that managers only want to sell shares when the business is
overvalued on the market. Asquith and Mullins (1986) showed that equity issues usually have
a negative influence on stock prices, which can cause underpricing. This effect was further
confirmed by Masulis and Korwar (1986). The price drop that occurs when the market
receives the news about a new equity issue makes using this form of financing less attractive.
Because the usage of leverage is considerably less affected by the private information of the
managers of the business, and is predominantly influenced by interest rates, using debt is
preferred over issuing equity because the level of underpricing is lower. Because no
asymmetric information problems exist with the use of retained earnings, there are no
transaction costs connected to them and they can immediately be used, the use of internal
sources of financing is the most preferred option.
The dividend payout policy of a firm is an important decision because it determines
which part of earnings has to be paid out to the shareholders and which part is retained within
the firm. New-issue DRIPs offer businesses a way to obtain new equity capital because the
company uses shares from its treasury stock to provide the participants with new shares, and
as such the firm increases its equity and is at the same time able to retain the cash it would
have otherwise had to pay to the shareholders. Consequently, new-issue DRIPs can be
beneficial for a company because they serve as an alternative equity raising mechanism that
enables a firm to meet the dual requirements of on the one hand providing shareholders with a
dividend and at on the other hand preserving earnings within the firm. The periodic additional
cash received through the plan can thus lessen the need of a business for traditional external
financing. According to Dubofsky and Bierman (1988), DRIPs are valuable because they can
improve the capital structure of a firm because it overall becomes less risky and leveraged.
Chang and Nichols (1992) also confirm that DRIPs can be valuable to reduce the dependency
of a business on debt. Moreover, DRIPs can be a good resolution for firms that deal with cash
shortage problems.
In the study executed by Finnerty in 1989, the influence of new-issue DRIPs on the
cost of equity capital was particularly studied. Specifically, the author focused on making a
comparison between the cost of capital of issuing equity through a DRIP, of traditional stock
issues and the cost of retained earnings. The conclusion was that the cost of using a DRIP to
raise equity was more substantial when retained earnings were used, but lower than when new
shares were issued. It can thus be concluded that, especially when the availability of retained
earnings is inadequate, it is beneficial for a firm to raise equity through a DRIP because it is a
cheaper method of financing.
By surveying managers of Australian firms, Zammit (1995) concluded that DRIPs that
offer a discount are used to make participating in the plan more appealing for investors and
therefore can be used by firms to raise a larger amount of cash, which aids to preserve the
preferred degree of liquidity of a firm. However, Finnerty (1989) also investigated empirically
the effect of offering a DRIP discount on the cost of capital. He concluded that a discount
DRIP does increase the cost of capital. Companies can thus make participating in a DRIP
attractive by offering a discount; however, the size of the discount should be small enough so
that the cost of raising equity through the plan remains below the cost of capital of a
traditional equity issue.
Anderson (1986) concluded that the most important motive for Australian firms to
introduce a DRIP was their ability to serve as a form of raising equity. Moreover, Fredman
and Nichols (1982) showed that DRIPs offer a considerable amount of working capital which
has the additional advantage of being relatively unaffected by macroeconomic conditions.
There is limited research about the exact amount of equity raised through DRIPs. Finnerty
(1989) created a Salomon Brothers estimate for 1983 and approximated the amount raised via
DRIPs for that year to be 4.6 billion USD for businesses in the US. Zammit (1995)
investigated Australian equity raisings through DRIPs and estimated the amount to be 3
billion AUS per year for Australian firms.
New-issue DRIPs are not merely an alternative for raising equity. The pecking order
theory can be used to provide an additional explanation why DRIPs can be useful for
corporations. A main advantage of using DRIPs is that they can be used by firms who want to
increase equity but wish to reduce the negative signaling consequences that would cause a
decline in the share price (Dubofsky and Bierman, 1988). Various researchers such as Dhillon
et al. (1992), Finnerty (1989) and Scholes and Wolfson (1989) have verified that new-issue
DRIPs can be a valuable alternative to issuing new shares traditionally since the negative
price signal after raising equity through a DRIP is considerably smaller as compared to a
normal public offering.
The explanation for the lower negative signal is that with new-issue DRIPs, businesses
raise relatively small amounts of funds incrementally over time while with a traditional capital
issue a single large block of shares is issued at once (Mukherjee et al., 2002). By spreading
the issue over time, the information asymmetries between shareholders and the management
are reduced because the information has more time to reach the market, for example through
the use of accounting disclosures (Scholes and Wolfson, 1989). In addition, stock dilution due
to the increase in shares, will be more spread out over time. Moreover, whereas with a usual
equity issue the management can time the issue when the stock is overvalued, this is not
possible with a DRIP because the equity it is raised in regular intervals.
When businesses experience inadequate resources to finance their dividends and are
consequently in need of capital they can decide to lower the dividend payout ratio. However,
another implication of the pecking order theory is that dividends can be considered “sticky”.
Businesses are unlikely to change their dividend policy if changes occur in the funding needs
of the business (Myers, 1977). According to Lintner (1956) firms set their payout ratio while
taking a long term perspective into account because they are unwilling to set a dividend
payout ratio that needs to be adjusted downwards in the future. Information problems can
again explain why firms that are in need of capital, are reluctant to implement dividend cuts
(Lintner, 1956). Bhattacharya showed in 1979 that when a business chooses to lower their
dividend payout ratio this communicates negative news about their present and future cash
flows to the market. Investors interpret the reduction negatively because it can signal that
managers foresee lower future earnings and deterioration in the financial situation of the
corporation. Various researchers later confirmed the negative price effect of dividend cuts (for
example: Miller and Rock, 1985). By implementing a DRIP, companies can commit to their
previously set dividend payout ratio while having lower cash outflows. As such, DRIPs can
be beneficial for firms who are in need of cash (Baker, 2009). However, the market reaction
after the implementation of a DRIP by a firm who is avoiding a dividend cut depends on how
easily the market can be fooled. If market participants are able to detect the true intentions,
the implementation of a DRIP could be interpreted as a signal that the management of the
firm expects a less favorable financial situation. While on paper the business keeps its payout
ratio steady, the same negative stock price reaction could thus potentially occur as would be
the case if it had cut its dividends.
When a firm raises equity in the traditional way, direct flotation costs have to be paid to
the investment bank that is used as the underwriter. These cost can be substantial, for example
Carlson (1996) found that the costs of issuing new equity were between five and fifteen
percent of the total amount raised. Eckbo and Masulis (1992) found a percentage of 6.09 for
industrial companies and 5.53 for utility firms. The costs that are paid to the underwriter
accounts for ninety percent of the total costs. Issuing equity through a DRIP can therefore be
substantially cheaper because these flotation costs are avoided because the broker is bypassed.
Moreover, the costs of implementing and administering a DRIP are significantly lower when
compared to issuing new stocks because less dividend checks have to be processed and also
less stock certificates have to be created (Chiang et al., 2004). MacQuarrie (1995) also
argued that DRIP-offering businesses can save costs when they need to send proxy
materials to investors. The author found that it is cheaper to distribute such information
straight to the individual shareholders as opposed to sending them via their broker.
Cherin and Hanson (1995) made an estimation of the usual cost savings generated by
dividend reinvestment plans, and found that raising funds via a DRIP usually ranges from
2% to 3% while investment bankers typically ask a fee which is between 3% and 5%.
Anderson (1986) argued that the savings in costs associated with a traditional equity issue,
were a substantial aspect that induced Australian businesses to adopt a DRIP. A positive
market reaction after the DRIP installment can thus also be partially explained by the
reduction in brokerage fees and transaction costs which would otherwise have been incurred
by the business. Moreover, Scholes and Wolfson (1989) argued that these cost savings also
can explain why firms offer a discount. Instead of having to use funds to pay an underwriting
fee to an investment bank, these funds can now be used by the firm to distribute to its own
shareholders who decide to participate in the plan, in the form of providing them with a
discount. Thereby participation in the DRIP can be enhanced.
2.1.2 DRIPs’ ability to signal a management’s forecasts
Another advantage of DRIPs is that the plans can be used as a way to provide positive
information to the market. The implementation of a new-issue DRIP results in more shares
outstanding and as such also increases the size of the dividends that are due by the firm (Chan,
1993). By instituting a plan the firm should be confident that it can meet its dividend standard
even if participation rates in the plan will be low. This can provide a signal to the market that
the management has positive earnings forecasts for the future or has enough upcoming
positive NPV projects. Namely, only in the case that the management is positive about the
future earnings of the firm it is willing to make additional dividend payout commitments. The
announcement of a DRIP can thus be perceived as positive by the market if investors believe
that it signals positive information concerning the forthcoming earnings of the firm (Dubofsky
and Bierman, 1988).
2.1.3 Improving shareholder relations
An additional advantage of DRIPs is that firms can implement them in order to improve the
relationship they have with their shareholders. For investors DRIPs are beneficial because by
participating in the plan they can purchase additional shares at a lower price than when
purchased on the market because no broker has to be used and a discount is often offered
through the plan. Consequently, reinvesting through the DRIP is therefore usually cheaper for
investors than when they use the dividends to buy the shares by themselves on the stock
market (Finnerty, 1989). Because shareholders can decide themselves whether or not to
participate in a DRIP, the plans provide them with the possibility to tailor the payout policy of
the business so that it fits their individual preferences. This facilitates the firm to attract
different clienteles with distinct dividend preferences (Finnerty, 1989). DRIPs can function in
this way as an instrument to generate goodwill and devotion among stockholders.
Survey research executed by Anderson in 1986 and by Zammit in 1995 among
Australian firms confirmed that the improvement of the firm’s relationship with its
shareholders was an important reason for businesses to implement a DRIP. Some firms also
implemented a DRIP in order to make investing in the firm more attractive for the customers
and employees of the company (DeGennaro, 2003). The improved brand loyalty can also be
an advantage because it can generate additional sales for the firm. According to Steinbart and
Swanson (1998) the sales of the business can be boosted. The argument provided was that
customers who hold stock in the company are less prone to buying from competitors.
Moreover, attracting customers to become shareholders in the firm can be beneficial
because of economies-of-scope. When a customer also owns shares, it becomes easier and
less expensive for the firm to approach them for other services because different forms of
marketing information can be delivered together with the usual shareholder communication.
DeGennaro (2003) also emphasized that it can be valuable to use DRIPs to entice employees
to become shareholders. Namely, if employees are also investors in the business they have
fewer incentives to shirk because when firm value is affected they also suffer the costs of their
shirking behavior.
Lastly, Chiang et al. (2004) also brought forward that improving the shareholder
relations can be beneficial because it lowers the possibility of an unsolicited takeover. When
investors are loyal to the firm they are less prone to support a takeover attempt, for example
during a proxy fight.
2.1.4 Reducing volatility
The loyalty can also be advantageous because it can preserve a stable demand for the shares
of the business. A more stable demand implies less stock price volatility. However, improved
loyalty is not the only reason which can explain the lower volatility due to DRIPs. Namely,
Davey (1976) argues that market DRIPs can lower the volatility because the companies who
offer such plans need to purchase the shares on the market which creates a solid demand for
the stock. Moreover, Chiang et al. (2004) showed that DRIPs can also lower stock price
volatility because the plans attract small individual investors who trade their stock less often.
In many DRIP prospectuses, firms explicitly write clauses that exclude institutional investors
and financial intermediaries from participating in the plan. In addition, firms can have a
requirement that forces investors to have their shares registered “on record” in order to
increase the fraction of retail investors in the firm1. Moreover, according to Mukherjee et al.
1
" (…) firms with company-sponsored DRIPs routinely require an individual investor to become the shareholder of record
in order to participate in their DRIP. This requirement helps to grow and stabilize retail ownership" (Berkman and Koch,
2013).
(...) by building a base of direct shareholders, a company might be less vulnerable to an institutional sell-off or to losing
favor with a brokerage firm." (Baker et al., 2002)
(2002), US laws can restrict participation in the plan to only individuals. Survey findings by
Davey (1976) confirm that the volatility reduction is one of the benefits that can clarify the
usage of DRIPs.
2.1.5 Broadening the shareholder base
The results of the survey findings by Davey (1976) also provided evidence that businesses
can implement the plans in order to broaden their share ownership, which can for example be
valuable in order to protect the firm against unwanted takeovers. This was further supported
by a study performed by Steinbart and Swanson (1998). They conducted a study in which
they evaluated the reasons for DRIP offerings by executing telephone interviews with firm
managers and by studying the prospectuses of businesses. Their main conclusion was that
DRIPs can be an efficient method of broadening the shareholder base of a corporation and
that this is therefore an important motive for companies to offer a DRIP. As explained in
section 2.1.4, DRIP participants are generally retail/individual investors. They usually apply a
buy and hold strategy and have a long-term perspective. Because they are less likely to trade
their stock as compared to institutional investors, offering a DRIP can have a stabilizing
influence on the stockholder base (Baker, 2009). In addition, new-issue DRIPs can raise the
expenses of a takeover attempt. Namely, with new-issue DRIPs, the total amount of shares
outstanding increases over time, which makes it more difficult and costly for an investor to
acquire a majority position within the firm. DRIPs can therefore be valuable for businesses
because the plans make it more costly for hostile investors to exploit a situation where the
firm experiences a period of underperformance.
2.2 Disadvantages of DRIPs
DRIPs are not always perceived as value increasing by shareholders. In the existing
academic literature various disadvantages are also outlined. In this section, the disadvantages
associated with the implementation of DRIPs will therefore be discussed.
2.2.1 Reduced market disciplining
As described in section 2.1.5, DRIPs can be used as an anti-takeover mechanism. Boehm and
DeGennaro (2007) use the same line of reasoning: DRIPs can also be used by businesses as a
device to entrench the management because they shield the management from outside control.
From the 1980s widespread shareholder activism emerged where institutional investors
obtained controlling positions in firms with the objective of altering the management of the
business (Friedman, 1996). Large institutional investors have motivations to screen the
management of a firm and if necessary, to try to achieve changes because such actions can
potentially lead to a higher value of the firm and hence of their own investments. However,
only the activists have to pay the costs associated with their actions while all shareholders
benefit from the value created by the realized changes. This results in a setting where only the
investors with large enough holdings can achieve returns that outweigh the costs related to
their activism. Because small investors hold only a small stake in the firm, they have fewer
motivations to monitor the management because they only have limited resources and time
(Baker, 2009).
When the management of a business engages in suboptimal investments or consumes
excessive perks this will be ultimately be discovered by the market, which causes a stock
price reduction. Through the market of corporate control shareholder activists will eventually
make corrections (Goshen, 1995). However, when there are a lot of institutional shareholders,
businesses could reduce their control by using new-issue DRIPs to intentionally broaden the
shareholder base. DRIPs may therefore reduce the disciplining effects of the market of
corporate control and lower the pressure that can be executed by activist shareholders and
block holders. This can be suboptimal because it generates a larger potential for the
occurrence of agency problems. For example, it makes it easier for the management to
entrench itself to the firm or to engage in shirking, the consumption of excessive perks or to
grant itself excessive compensation.
When firms issue equity they also undergo rigorous outside monitoring by for
example financiers, analysts, accounting firms and examinations by investors in security
markets. This reduces information asymmetries. This process does not happen sizably with
dividend reinvestment plans. Because of the lower scrutiny, the uncertainty concerning the
true value of the business is higher which can result in security underpricing (Roden and
Stripling, 1996).
Lastly, DRIPs are used so to bypass the underwriter which can be a disadvantage too.
This is because the usage of a respected investment bank as the underwriter can be an
indicator for investors of the quality of the issue. For firms it is difficult to convincingly
signal their true value because of information asymmetries. Respectable underwriters however
can be valuable for the firm because they can help them to more credibly signal their value
and to persuade the shareholders of the accuracy of the share price. An example in which this
is done is the use of road shows before an initial public offering (Booth and Smith, 1986).
Companies can thus profit from using an esteemed underwriter because it can validate their
price. In the paper by Tinic (1988) it was argued that the absence of underwriter accreditation
in the case of DRIP issues could result in lower stock returns and shareholder value.
2.2.2 Earnings per share dilution
Another disadvantage reported by the study by Davey (1976) is that new-issue DRIPs
have the potential of diluting earnings per share because of the increase in the equity of the
firm. With discount DRIPs this potential dilution effect is even more substantial (Abraham,
2012). Chan et al. (1993) provided anecdotal evidence of firms that postponed their dividend
reinvestment plan or reduced the discount offered in the plan because of the earnings per
share dilution that was caused by the plans.
2.2.3 Free cash flow problems
The free cash flow problem is another problem that can be aggravated by the initiation of a
DRIP. New-issue DRIPs provide the management regularly with surplus cash. Jensen (1986)
argued that agency problems could possibly occur if this surplus cash is invested in
negative NPV projects or is used by the management for consuming corporate perks. In
addition, the management can engage in empire building, which implies that they increase
the size of the firm beyond its optimal level for reputational reasons or in order to increase
their compensation. The shareholders have to bear the costs of the inefficient cash flow use
because it lowers the value of the company. Because new-issue DRIPs generate a continuous
source of additional funds for companies, the agency problems are expected to be especially
large during times when few positive NPV projects are available (Saporoschenko, 1998).
2.3 Market reaction to DRIP announcements
The majority of the empirical studies concerning DRIPs consist of event studies that examine
the impact on the returns of securities and the shareholder wealth implications around the
dates on which a business announces the offering of a dividend reinvestment plan. The
studies have been performed with both US and Australian data. However, the results of the
studies are ambiguous.
Dhillon. (1992) investigated the impact of both discount and non-discount DRIP
initiations on stock prices for the sample period 1976 to 1987. In their study they made a
specific comparison between industrial and utility companies. Their sample contained 71
utilities and 76 industrial businesses. They only found a significant negative reaction over a
[0,1] event window for the industrial companies that initiated a DRIP without a discount.
However, according to the authors these stock price reactions were considerably smaller than
when compared to usual equity issues. The authors argued that these findings provide
evidence that issuing equity through a DRIP is valuable because the negative stock price
reaction is less substantial. For the industrial and utility firms that adopted a discount-DRIP
and for the utility companies that offered a non-discount DRIP, the stock price reactions
found in the study were statistically insignificant.
Roden and Stripling (1996) used a sample of 153 utility firms for the period 1971 to
1981 and found significant positive abnormal stock price effects for three intervals, namely
the [-15, -1], [-10, -1] and [-5, -1] daily event windows before the announcement of a DRIP.
No significant reactions were however found after the DRIP announcement. These
researchers also stated in their paper that a potential explanation for these positive reactions
is the capability of issuing equity via a DRIP to circumvent the common negative stock price
response, which generally occurs with issuing new shares. In addition, they provided as an
argument that by using a DRIP the firm does not have to pay the large fees associated with
underwriting of the stock issue.
The study by Dubofsky and Bierman (1988), as cited in Scholes and Wolfson (1989),
reported significant positive abnormal returns when investigating the three days around the
announcements of discount DRIPs for the sample period 1975-1983. The positive stock price
!
!
reactions were between !% and !%. However, the small sample size which was used in this
study consisting of only 33 utility firms and 20 non-utility firms. The external validity is
might be limited though, since a small sample size was used which might not have been fully
representative for both sectors. No differences in the effects between utility and non-utility
firms were found.
Perumpral et al. (1991), summarized in Saporoschenko (1998), discovered
significant positive abnormal returns when investigating the month in which the DRIP was
first announced by a firm. Their sample contained 160 DRIP offering businesses and the
period investigated was 1968 to 1980. However, when further splitting the sample between
discount and non-discount DRIPs, they found that the abnormal returns for discount DRIPs
were insignificant and surprisingly for the non-discount DRIPs they were significant positive.
Peterson et al. (1987) as cited in Chan et al. (1996), investigated the SEC filings of
newly issued shares through DRIPs by both utility and industrial companies. They used a
sample of 48 utilities and 70 industrial firms and focused on the period 1976 to 1983.
They found positive but insignificant average abnormal returns over a [0, 1] event window.
In 1981, a special tax exemption of 750 dollar, on dividend reinvestment was offered to
investors in utility firms in the US. This made it more advantageous for investors to
participate in a DRIP because it gave them the additional tax benefits. A specific focus of
the paper was therefore to make a comparison between the stock price reactions to DRIP
initiations before and after this tax exemption for the subsample of utility businesses.
The authors reported significant negative abnormal returns for utilities before the tax
exemption, and significant positive abnormal returns in the exemption period. These
results are not surprisingly because they mainly confirm that investors consider it
valuable that the plan provides them with extra financial rewards.
Chang and Nichols (1992) confirm the findings concerning the effect of the
implementation of the tax exemption in 1981. Just like Peterson et al. (1987) they found
that utility firms that were eligible to offer participants the tax exemption experienced
significant positive abnormal returns around the DRIP announcements. In addition, their
research also showed that the participation rates in DRIPs of the qualifying utility firms
increased after the change of the tax system.
In Australia a system in which double taxed had to be paid on dividends was
abolished in 1987, and as such participating in a dividend reinvestment plan became also
more advantageous for shareholders. The effect of the change to this new taxation standard,
called the dividend imputation system, on the abnormal returns around DRIP announcements
was investigated by Chan et al. (1993).
In their event study, they found insignificant
abnormal returns around DRIP announcements before the reform. However, after the reform,
positive abnormal returns were found. This is not surprising because it reflects that the
market responds positively on the elimination of the double dividend taxation.
Although various studies made a distinction between discount and non-discount
DRIPs, the effect of the size of the discount was often not taken into consideration. If an
optimal discount size would exist this would impact the magnitude of the market reactions. A
later study by Chan et al. (1996) therefore focused on investigating the market reactions while
considering discounts of various sizes in order to investigate the existence of an optimal
discount level. The authors used Australian data and found that overall, the market responded
positively to the announcement of a DRIP. However, the market reaction to various discounts
differed noticeably. Specifically, they researched DRIPs that offered 10%, 7.5% and 5%
discounts for the years 1984 to 1989. They only found a significant positive stock price
reaction on the announcement day for the 7.5% discount sample. The reactions for the 5% and
10% subsamples were all found insignificant. The authors provided various arguments for
these results. The 5% discount DRIPs in the sample were mainly used by firms prior to the
initiation of the dividend imputation regime. The 7.5% and 10% discount DRIPs were mostly
offered after the tax change, which overall made DRIPs more attractive. A potential
explanation for the insignificant reaction to the plans with a 10% discount provided by the
authors is that this considerable large discount was not equally perceived as valuable by all
investors. Namely, the large discount would imply a wealth transfer from the investors who
do not participate in the plan to the ones who do. The authors stated that the 7.5% discount is
likely is nearer to the optimal discount.
2.4 Working capital management literature
An important firm characteristic, which will be investigated in this study, is the degree of
financial constraints of a firm. Therefore, in this section, the related literature concerning
financially constrained firms will be provided. As explained by Lamont et al. (2001), a firm
can be constrained in various ways. For example, it can be because of credit constraints, not
being able to borrow or issue equity, a heavy reliance on bank loans or due to asset illiquidity.
Financial constraints can have an important influence on the financial management of
businesses. Namely, firms that are financially constrained experience frictions that restrict the
business from being able to fund all preferred investment chances. Because constrained
businesses are less capable of obtaining external funds at a reasonable price, they are either
unable to participate in all available positive NPV projects or they need to use overly costly
forms of financing which has harmful implications for firm value (Williamson, 2013). Fazzari
et al. (1988) argued that the investment made by businesses therefore does not only depend on
the availability of positive NPV investment projects but is also highly dependent on the
amount of internal reserves held by the company.
Unconstrained companies have unhindered access to capital. Consequently, liquidity
management is not essential for them because they have the necessary capital to finance
potential future investments. For constrained firms on the other hand, managing their liquidity
is a crucial point of concern because it is essential that the business preserves sufficient funds.
Keynes (1936) argued that companies hold cash as a safeguard for unfavorable future
cash flow shocks. The study performed by Opler at al. (1999) confirmed that a main reason
for holding cash is to deal with cash flow volatility. Two papers have previously investigated
the relationship among the degree of financial constraints of a firm and its cash reserves.
Almeida et al. (2004) were the first to find a positive relationship between the total cash
holdings of a business and its level of financial constrains. Namely in their study they showed
that firms that are more constrained in their capability to finance investment opportunities,
save on average more cash as compared firms with fewer constrains. They hold these reserves
in order to prevent the situation of lacking funds for future investment opportunities. Also
Denis and Sibilkov (2009) concluded that firms that have restrains concerning their financing
options have higher levels of cash because it is more difficult and more costly for them to use
outside financing.
2.5 Financial crisis literature
One objective of this study is to research whether the firm characteristics of DRIP offering
companies are different during the occurrence of a financial crisis as opposed to normal times.
In this section, relevant literature concerning the consequences of a crisis on the financial
position of businesses will be discussed.
According to Brunnermeier and Pederson (2009), liquidity co-moves with the market
and can therefore suddenly dry up during a financial crisis. During a crisis financial
institutions reduce their market liquidity provision by decreasing the credit they provide to
firms. The recent financial crisis, which started in August 2007, therefore has had striking
consequences for the liquidity positions of firms. Because financial institutes incurred large
losses on their financial positions their ability and readiness to take on risk was substantially
reduced. As a result, the standards for borrowing were drastically increased and that supply of
credit to firms was reduced (Duchin et al., 2010). For example, the paper by Ivashina and
Scharfstein (2010) provided proof that financial institutions firmly limited their provision of
loans to the corporate sector in times of crisis. The reduction in the availability of external
financing hampers investment when firms have insufficient internal funds (Duchin et al.,
2010). This was confirmed by survey research executed by Campello et al. (2010). Namely,
after surveying managers of US firms, the authors concluded that companies had to sacrifice
positive NPV projects during the crisis because of binding external financing limitations.
Duchin et al. (2010) found that the negative effects of the crisis were especially harmful for
companies that have low levels of cash, who are very reliant on external funds or who are
financially constrained. The financial crisis does not only have a negative influence on the
amount of external capital available to businesses but during crisis times also the spread
between the cost of internal and external funding methods is enlarged (Bernanke, 1993). This
is especially harmful for more financially constrained businesses because they already
experience larger costs in obtaining external funds and they also have a greater need to use
external sources because of their limited internal funds. Moreover, Campello et al. (2010)
found that during a crisis, financially constrained companies implemented larger reductions in
the investments and overall expenditure of the business. In addition, they used more cash,
used their available credit lines to a larger extend and also sold more of their assets to obtain
funds as compared to unconstrained firms.
It is very important to have sufficient levels of working capital, which incorporates
cash, as a security for situations in which credit becomes more restricted. Enqvist et al. (2012)
showed that working capital is of greater importance during times of distress as compared to
periods with a normal economic climate. Moreover, according to Fazzari and Petersen (1993)
working capital management of a business is more important when the firm is more
financially constrained. Almeida and Campello (2010) confirmed this. Namely, they found
that more severely constrained companies have a larger need for working capital and cash
savings. Fredman and Nichols (1982) argued that DRIPs can offer a considerable contribution
to the working capital of a business since the plans increase the cash holdings of the business.
DRIPs can thus play a substantial role of importance in the liquidity management of a
company and can ease the financial situation of firms during a crisis.
3. Hypotheses development
In this paper it will be investigated which firm-characteristics can influence the decision of a
firm to offer a DRIP. In section 3.1, the firm characteristics that will be researched will be
discussed. Moreover, the underlying hypotheses for investigating these specific characteristics
will be described. In section 3.2, various DRIP features will be described and the hypotheses
concerning the influence of firm specific factors on the usage of these features will be
provided.
3.1 Hypotheses concerning the firm-characteristics of DRIP firms
The degree of financial constraints of a firm is one of the main firm characteristics on which
this research will focus. One channel through which businesses can potentially ease their
financial constraints is through the adoption of a DRIP. As explained in section 2.1.1 of the
literature review, one of the main benefits of dividend reinvestment plans is that they can be
used as an alternative for issuing equity in the traditional way. Because new-issue DRIPs
increase the cash available to the firm, they can be particularly valuable for firms that are
financially constrained. Because DRIPs can function as a valuable device to alleviate financial
constraints, it is hypothesized that:
H1: Firms that are more financially constrained are more likely to offer a DRIP compared to
less constrained firms
The WW index created by Whited and Wu (2006) and the KZ index founded by Kaplan and
Zingales (1997) are two generally accepted indices that will be used to measure how
financially constrained a company is. Both indices take into account various firm
characteristics that affect the level of constraints of a firm.
As explained in section 2.1.1, DRIPs cannot only be a cheap source of capital for firms but
they also have less negative signaling implications on firm value than when stock is issued
directly. These benefits are especially valuable for firms with a great need for obtaining
funding. The usual life cycle of a company consists of a start-up phase and is followed by a
stage of growth. Subsequently, the firm will enter a phase characterized by mature growth and
lastly a period of decline will arrive (Baker, 2009). The dividend policy of a business typically
also develops during these various stages following a common pattern. When a firm is in its
startup phase generally all earnings are retained and no dividends are paid so firms also do not
offer DRIPs. The payout of a dividend usually starts in the second stage. In this phase they
have positive NPV investment opportunities but only limited capacity to generate the
necessary capital internally (DeAngelo and DeAngelo, 2007). The dividends are usually
further increased during the third stage when more earnings become available from operations,
which can be paid out to the shareholders (Mukherjee et al., 2002).
Businesses that experience high growth also have high needs for funding. Both
internal and external financing can be used. However, according to Higgens (1981) quickly
growing companies highly depend on the usage of external financing since their internal
capital is usually insufficient to finance all required investments and their capital needs are
higher than the incremental cash flows of its projects. As described in section 2.1.1, using
external financing usually however, has a negative influence on the share price of the
company. Also, once a firm starts paying out dividends, it is generally unwilling to implement
dividend cuts to finance growth because of the negative signaling effect as described in
section 2.1.1, which has harmful consequences for the stock price of the company.
Implementing a DRIP can therefore be valuable for firms because they can serve as a way to
finance growth with lower negative signaling consequences. Previous research executed by
Mukherjee et al. (2002) confirmed that companies who go through a phase of high growth
like to use DRIPs in order to retain some additional cash in order to ease future expansion.
As explained in section 2.2.3 a disadvantage of DRIPs is that they can amplify free
cash flow problems. The additional cash obtained through the plan can be abused by the
management. This can be a reason for firms not to implement a DRIP because the abuse of
cash by the management can lower the value of the company. For high growth companies, the
problem of cash flow abuse will be less prevalent because the company has plentiful
investment opportunities. According to Saporoschenko (1998) this can also explain why high
growth firms that pay dividends could tend to offer DRIPs more often. To conclude, when
dividend-paying companies offer DRIPs, it is likely that they go through a period of rapid
expansion. The hypothesis which will be tested it therefore:
H2: Firms that offer a DRIP have more growth opportunities than dividend-paying firms
who do not offer the plans
Leverage however, can have a disciplinary function, which reduces the likelihood of cash
flow abuse. Namely, when companies have high levels of leverage this implies that interest
payments first have to be fulfilled. This reduces the cash that is available to managers, which
could have potentially been used to perform actions that harm firm value. Because leverage
lowers cash flow misuse, it can therefore be expected that companies are more likely to
implement a DRIP when they have high levels of leverage. Moreover, according to research
by Tamule et al. (1993), firms use DRIPs more often when they are close to reaching their
debt capacity. When firms already have high amounts of leverage it might be difficult and
costly to attract new capital because of higher risk of default. By using a DRIP, firms can
reduce their dependence on external financing. As explained in section 2.1.1, DRIPs can be
valuable because they make the capital structure of the company less risky. So if the DRIP
implementation is driven by a firm’s need for additional funds, it is probable that these
businesses have a higher degree of leverage as compared to companies who do not have
DRIPs. Lastly, according to Smith and Watts (1992) companies with higher leverage are also
more likely to pay dividends, which could also infer a higher probability of offering a DRIP.
As such, the hypothesis that will be tested is:
H3: Companies with high amounts of debt are more likely to offer a DRIP compared to
businesses with low debt levels.
The size of the payout ratio will also be investigated. Companies that have a high payout
ratio can be tempted to offer a DRIP in order to ease their dividend payment obligations.
Namely, by offering the plan, they can sustain their payout ratio or decide to increase it
further while at the same time retaining earnings. Therefore, they do not have to suffer a
large deterioration in their cash flow position. It can be hypothesized that the implementation
of a DRIP will be most tempting for companies that already have a high payout ratio. Firstly,
this is because the larger the dividend payout ratio of a company, the larger is also the
amount of funds that can be obtained through the plan. Moreover, as payout ratios increase,
firms run more risk of having to cut their dividends because of cash shortages. However,
firms are averse to cutting their dividends when there is deterioration in their cash flow
position because of the negative effect it has on the stock price of the firm. A DRIP can help
a firm to commit to its payout rate because of the additional cash retained through the plan.
However, as the ambiguous event study results discussed in section 2.3 indicated, it is unsure
whether the firm is truly able to fool the market or whether market participants actually
understand that the initiation of a DRIP actually implies that the firm cannot pay its
dividends. The hypothesis that will be tested is therefore:
H4: Firms with high dividend payout ratios are more likely to offer a DRIP as compared to
firms with low payout ratios.
Another characteristic that will be investigated is the liquidity of a firm. Liquidity
management is very important for a company in order to warrant that the firm has adequate
amounts of cash or cash equivalents. Namely, this makes a firm better able to meet both
anticipated and unanticipated financial commitments. From a long-term perspective it is
necessary for companies to have enough capital reserves. According to Cherin and Hanson
(1995), DRIPs can be very beneficial for companies that have liquidity problems because of
the additional cash they can provide. Presumably, firms with high liquidity have, ceteris
paribus, fewer motivations to implement a plan because they already have a lower
probability of financial distress problems. It will therefore be tested whether:
H5: Businesses with low liquidity tend to offer a DRIP more often than firms with high
liquidity
Firm characteristics which proxy the profitability of a business, will also be researched in this
paper. It is plausible that firms that have low profitability are more likely to offer a DRIP in
order to safeguard that still adequate capital is retained in the business. The hypothesis is
consequently:
H6: Businesses with low profitability are more intended to use DRIPs then firms with high
profitability
Another firm characteristic that will be investigated in this study, is the volatility of the stock
of a firm. As explained in section 2.1.4 of the literature review, firms might be able to lower
the volatility of their stock by offering a dividend reinvestment plan. As previously discussed,
this is because plan participants are individual investors who are known to trade their stock
less frequently. Moreover, market DRIPs can create a stable demand because the firm buys
back shares at regular intervals. As such, the hypothesis that will be tested is:
H7: Firms with stable stock are more likely to have a DRIP in place as compared to firms
with more volatile stock.
Even though the cost of raising equity via a DRIP is lower than through an underwriter, the
costs of offering a DRIP can still be substantial. Besides the startup costs there are also
annual maintenance expenses such as the administration, marketing and promotion of the
program (Chiang et al., 2004). Early research performed by Davey in 1976 indicated that
DRIP administrators usually require a fee of up to five percent of the amount of dividends
reinvested by investors up to a maximum of between $1.50 and $3.00 per shareholder. A
study performed by Davey in 1976, found that the financial institutions that perform the
administration of dividend reinvestment plans normally charge a fee which is approximately
5% of the dividends of the amount that will be reinvested, up to a maximum which ranges
between $1.50 and $3.00 per stockholder. However, in a more recent study by DeGennaro in
2003, the costs charged to DRIP offering firms were estimated to be between $12 and $16
per shareholder. The expenses associated with DRIPs are important aspects that firms take
into consideration when contemplating DRIP adoption (Davey, 1976). Because the costs
associated with the initiation and the continuation of the plans can be substantial in size, they
can in some cases outweigh the advantages of the plan.
The implementation of DRIPs is often less expensive for large firms. This is because
economies-of-scale are experienced by larger businesses (Larkin, 2005). Large firms usually
have relatively lower expenses when compared to small businesses because they can use
their own internal divisions. When a firm implements a DRIP it should communicate
information about the plan to its shareholders. The firm itself can create a plan prospectus or
the company can use a transfer agent to establish the documentation (Berkman and Koch,
2012). Large firms have their own internal legal divisions, which can construct the DRIP
information for the potential investors, while smaller companies need to consult external
experts often at a higher cost. In addition, firms typically use a transfer agent for the
administration of the shares distributed through a DRIP. According to Chiang et al. (2004),
around 12.5% of all DRIP offering companies administer their own DRIP while 87.5% uses
an agent for the administration. Large companies usually also need to use administrators for
other stock-related issues. It is therefore likely that they can negotiate lower total fees, when
the administrator is used for various services. According to Abraham (2012), the average cost
of DRIP offerings per stockholder is therefore likely to be lower for larger sized companies.
In addition, as explained previously, in the startup phase of a company the firm
generally does not pay dividends and as such will also not implement a DRIP. When a
company grows bigger over time, more funds also become available to distribute to the
shareholders. When a firms starts paying dividends it is likely to be larger in size and as such
the possibility of offering a DRIP also becomes larger. In this study it will be especially
investigated whether larger firms are more likely to offer a DRIP due to economies-of-scale.
The hypothesis which is tested is therefore:
H8: Large dividend-paying firms are more likely to offer a DRIP than small dividend-paying
firms.
As explained in section 2.1.5, companies can reduce the monitoring power of institutional
shareholders by offering a DRIP because it broadens the shareholder base. The small
individual investors attracted by offering a DRIP are less outspoken and also have fewer
incentives to question the decisions made by the management or to demand changes. If the
managers of a firm are concerned about preserving their own control, they aspire diffuse
ownership. Broadening the shareholder base can therefore also be beneficial in order to
reduce the probability of an unsolicited takeover. It can therefore be hypothesized that when
firms have a shareholder base with a large fraction of institutional investors they are more
likely to adopt a DRIP. The hypothesis is therefore:
H9: Firms with a relatively large share of institutional investors are more likely to offer a
DRIP than firms with a small institutional investor base.
Another characteristic that is investigated in this paper is the fraction of equity held by the top
management of the firm. When the management of a business owns a large proportion of the
shares of the firm it has less needs to implement antitakeover provisions because it is more
shielded from hostile takeover threats because it already holds high degree of control in the
firm. As such it can be expected that DRIP usage is lower for such businesses. Moreover, if
the management holds a large stake in the firm the initiation of a DRIP can dilute their voting
power, which can make the implementation of a DRIP less desirable from the personal
perspective of the management. Hence, the hypothesis that will be tested is:
H10: Firms with a relatively large fraction of insider ownership are less intended to offer a
DRIP than firms with a small fraction of insider holdings.
The sample period used in this paper includes the financial crisis, which started in 2007, so
that DRIP and non-DRIP firms can be investigated both in normal and financially distressed
times. Because companies’ access to capital markets is reduced in times of financial distress
and liquidity dries up, the additional cash provided by a DRIP can be especially useful for
firms. As explained in section 2.1.5 shareholders who take part in a DRIP are usually have a
considerably more long term investment perspective and generally apply a buy and hold
strategy. Even though investors can change their DRIP participation at any time,
participation rates in DRIPs are relatively stable and investors are not very likely to change
their participation in the plan when there are changes in macroeconomic conditions. As a
result, a DRIP plan can provide a firm with recurring cash inflows that are reasonably steady
(Saporoschenko, 1998). Because DRIPs offer an alternative way of obtaining funds, which is
especially valuable during a crisis when obtaining funds is more challenging, it can therefore
be hypothesized that:
H11: Firms are more likely to offer a DRIP during a financial crisis
3.2 Hypotheses concerning DRIP features
In this study it will also be specifically researched how the features of dividend reinvestment
plans differ among various types of companies and when comparing normal to financially
distressed times. The different DRIP features will first be discussed and the main hypotheses
will be described.
There are various features that firms can provide in order to make participating in the plan
more attractive to shareholders. The most important one is the discount, which enable
investors to buy shares at a lower price than the market share price. According to research by
Chiang et al. (2004), discounts usually range from 1 to 10 percent. However, the most
commonly used discounts are 3 and 5 percent.
Another feature is the “partial reinvestment option”. With a traditional DRIP, the
full amount of the dividend paid to the shareholders is reinvested in the company’s stock.
However, with the partial reinvestment option, participants can partially reinvest their
dividends in shares while receiving the other dividend part in cash.
Another feature, which can increase the attractiveness of DRIPs, is the “cash
option”, which enables shareholders to invest additional amounts in order to purchase more
shares. How frequently the additional investments are invested differs per plan. They differ
from very often, from daily reinvestments to only once a year. According to Chiang et al.
(2004) the amounts range from $50 to $150.000. Various firm prospectuses indicate that this
cash option program may also give a benefit throughout the year outside of dividend events.
For example, the firm Heward Packard paid quaterly dividends but allowed monthly
additional cash investments.2 For investors using the cash option can be advantageous
because the shares can usually be bought at a lower price compared to the market. The
company is able to demand a lower price because of the cost savings as explained in section
2.1.1. Another advantage for investors is that decision to invest is made each period, so there
is no long-term commitment necessary. The firm usually ties both a minimum and a
maximum to the investment. But because the maximum amounts allowed to invest
additionally are often large (American Association of Individual investors, 2000) this cash
option provides a low-cost method for investors to increase their shareholdings in the firm.
Traditional dividend reinvestment plans are only offered to existing shareholders of
the firm. So at least one share should be owned in order for an investor to be able to
participate in the plan. However, some companies also offer a “Direct Investment option”.
This implies that investors can buy initial shares directly from the company instead of having
to buy them through a broker. Again, this option can be valuable for investors because of the
usually lower share price because no broker fees have to be paid. After taking part in such a
Direct Investment Plan, the investors can increase their shareholdings by buying additional
2
HP dividend/ reinvestment stock purchase plan,
http://media.corporate-ir.net/media_files/irol/71/71087/pdf/DRP_brochure_9_22_06.pdf
shares with reinvested dividends or by making additional cash investments. Usually there is a
minimum investment requirement; this ranges generally from $50 to $2.000 (American
Association of Individual Investors, 2000). However, the investment is not bounded by a
maximum. Offering a direct purchase option can thus be used raise the amount of capital.
According to the American Association of Individual investors (2000), discounts are
usually offered only on dividends that are reinvested. However some firms also offer the
plans for the cash option and direct investment options. While others only offer a discount
when the shares are newly issued and not when they are bought on the market.
The aforementioned DRIP features indicate that DRIPs can provide participants
with repeated benefits throughout the year. As such the features can be offered by firms to
make participating more attractive and consequently raise the number of participants. In
addition, the cash option and the direct investment option are expected to be particularly
beneficial for firms with a larger need for capital. As explained in section 3.1 there are
various firm characteristics, which can indicate that a firm has a larger need for capital. For
example, it is hypothesized that more financially constrained firms, firms with more growth
opportunities, businesses with higher amounts of debt and firms during a financial crisis have
higher capital needs. These characteristics might not only affect the decision of a firm to
offer a DRIP but among the companies that provide DRIPs it can also affect the decision to
offer any of the aforementioned participation enhancing features. Therefore the final
hypothesis is:
H12: DRIP offering firms with relatively higher capital needs are more likely to make the
plan more attractive by using participation enhancing features than firms with relatively
lower capital needs.
4. Data collection
In this part of the paper, it will be described how the data was obtained. The main data source
that was used in this study was the AAII Stock Investor Pro database, made available by the
American Association of Individual Investors (AAII). According to their website, the data in
this database was collected from three main data providers, namely; Thomson Reuters, The
Chicago Board Options Exchange and The Moneypaper's directinvesting.com. This later
source provided the information concerning dividend reinvestment plans. Publications on
firms with DRIPs are made quarterly available in the AAII Stock Investor Pro database. The
database contains data of over 7000 NASDAQ, NYSE, and AMEX listed companies. For
every firm in the database it is stated whether or not the company offers a dividend
reinvestment plan. For the DRIP offering businesses it is also indicated whether the firm
offers a discount, provides investors with the cash, direct or partial reinvestment options and
whether a service fee is charged. Unfortunately, however, it is not indicated whether the
dividend reinvestment plan is a new-issue plan or a market plan.
As outlined in the hypothesis part of this paper, in order to research how firms that
offer DRIPs differ from those that do not offer them, data on various firm characteristics that
could be potential determinants for DRIP usage will be obtained. For each year over the
sample period 2003-2012, data was collected for each firm listed in the Stock Investor Pro
database. Following Lasfer (1997), financial firms were excluded from the sample because
they have specific tax treatments and firm characteristics. For every one of the firms in the
sample it was indicated in the Stock Investor Pro database whether the firm offered a DRIP in
each of the years. For the specific firm characteristics it will now be explained how the data
was collected. If no information could be obtained for these characteristics of a particular firm
a dot was recorded in the data file indicating that it was considered missing.
Financial constraints
The KZ index created by Kaplan Zingales (1997) is the first index which is used to measure
how financially constrained a company is. For every firm in the sample, it is computed with
the following formula:
!"!"
𝐾𝑍 = −1.001909 ∗ !"
!"!!
!
!"#!"
+ 0.2826389 ∗ 𝑇𝑜𝑏𝑖𝑛! 𝑠 𝑄 + 3.139193 ∗ !"!" − 39.3678 ∗ !"
!"
!"!!
−
!"!"
1.314759 ∗ !"
!"!!
Where CF is the sum of income before extraordinary items (Compustat annual item 18: IB)
and depreciation & amortization (item 14:DP). AT is the total assets of the firm (item 6:AT).
Tobin’s Q is the sum of total assets and the fiscal-year end market value of equity (obtained
from CRSP) deducted by the book value of common equity (item 60:CEQ) minus deferred
taxes derived from the balance sheet (item 74:TXDITC) divided by total assets. D is the debt
of the firm derived as the sum of long-term debt (item 9:DLTT) and current liabilities (item
34: DLC). TC is the total capital of the firm which is the sum of the long term debt (item
9:DLTT), the current liabilities (item 34:DLC) and stockholder’s equity (item 216:SEQ).
Dividends is the sum of the common stock dividends paid by the firm (item 21:DVC) plus
dividends paid on the preferred stocks (item 19:DVP). CS is the cash and short term
investments of the firm (item 1:CHE). In order to minimize the impact of outliers all
components of the Kaplan Zingales index are winsorized at the five percent level. In addition,
following research by Duchin et al. (2010), outliers in Q were controlled by applying an upper
boundary value of 10.
There has been some criticism on the Kaplan Zingales index. According to Whited and Wu
(2006), a shortcoming of the index is that the sample that was used to construct the variable
weights consisted of only manufacturing companies in the 1970s and 1980s. It could therefore
be that the index would be too focused on this industry and time period. Whited and Wu
therefore created an alternative financial constraint index in order to address the concerns.
The WW-index is therefore the second index that is used in this study to measure the degree
of financial constraints. It is computed according to the following formula:
𝑊𝑊 = 0.938407 − 0.091 ∗ 𝐶𝐹𝑇𝐴!" − 0.062 ∗ 𝐷𝐼𝑉𝑃𝑂𝑆!" + 0.021 ∗ 𝑇𝐿𝑇𝐷!" − 0.044 ∗ 𝐿𝑁𝑇𝐴!"
+0.102 ∗ 𝐼𝑆𝐺!" − 0.035 ∗ 𝑆𝐺!"
The data on the different variables will be obtained from the Standard and Poor’s Compustat
annual database. In the equation, CFTA is the cash flow to total assets ratio, which can be
defined as the sum of income before extraordinary items (Compustat item 18:IB) and
depreciation & amortization (item 14:DP) divided by total assets (item 6:AT). DIVPOS is a
dummy variable, which is one if the firm pays cash dividends and zero if it does not. TLTD
is the long-term debt to total assets ratio (item 9:DLTT) divided by total assets (item 6:AT).
LNTA is the natural log of total assets. ISG is the company’s three-digit industry sales
growth and SG is firm’s sales growth. The higher the value of the index the more a business
is considered to be financially constrained. Following research by Bodnaruk et al. (2013) all
components of the Whited Wu index are winsorized at the 5% level before calculating the
index except for the dividend dummy. For both the KZ and WW index it holds that the higher
the value of the index the more a firm is considered to be financially constrained.
Future growth opportunities
Following Hwang and Kim (2011), the natural logarithm of Tobin’s Q will be used as a proxy
for the future investment opportunities of the business. Tobin’s Q is a ratio which is derived
by taking the market value of the assets of a business and dividing it by the replacement value
of the assets (White, 2014). The proxy indicates the market expectations of future profitability
and is consequently a common proxy measure for future growth (Bruno and Sachs, 1982). It
has been used in various previous studies such as for example by Lasfer (1997) and Goktan
and Kieschnick (2009).
Leverage
In order to test the debt hypothesis, I follow Mukherjee et al. (2002) who used the long-term
debt to total assets ratio as a proxy for the financial leverage of a company when investigating
DRIP firms. It is calculated by taking the long term debt of the company (Compustat item
9:DLTT) and dividing it by the total assets (AT). The ratio shows the percentage of a firm’s
assets, which are supported with loans with a maturity longer than one year. The ratio is
chosen because it emphasizes the dominant role that especially long term debt can play in the
decision of a firm to offer a DRIP. Namely, loans with a long duration also require a long
term interest payment commitment. Since DRIPs provide firms with a steady periodic
additional cash inflows, they can be valuable for firms to make such commitments.
Payout ratio
The dividend payout ratio of a company is derived from the AAII stock investor pro database.
This ratio was calculated by AAII, by dividing the total dividend payments per share of the
firm by the earnings per share.
Liquidity
The liquidity of the firm will be measured by the current ratio, which is established by
dividing the current assets (Compustat annual item 4: ACT) by current liabilities (item
5:DLC). A low current ratio implies a higher level of illiquidity and therefore also more risk of
financial difficulties. Namely, it can indicate that firms have inadequate current assets
available to meet their current liabilities, which can cause problems in the case of unexpected
cash flow reductions.
Institutional ownership
The percentage of institutional ownership is obtained from the AAII stock investor pro
database. However, the original source from which AAII obtained this data is the CDA
Spectrum institutional holding database made available by Thomson Reuters. This database
contains institutional 13F filings. Starting from 1978, all institutions that manage more than
$100 million of securities are required to quarterly report al of their investments to the SEC in
13F reports, which are bigger than 10000 stocks or have a value more than $200000 (Seah,
2011). The percentage of institutional holdings listed in the database was derived by dividing
the total shares of institutional investors by the total shares outstanding of the company.
Insider ownership
The percentage of insider ownership was also obtainable from the AAII stock investor pro
database. AAII obtained the ownership percentages from Thomson Reuters. They were were
established with information from the proxy statements of firms. The percentage of insider
ownership is defined as the percentage of common stock owned by the officers and directors
of the company as well as the beneficial owners who hold a stake of more than five percent in
the firm’s equity. It could be argued though that beneficial owners with holdings larger than
5% are not necessarily insiders, which could potentially skew the measure. This is therefore a
drawback of using this insider ownership percentage. However, I believe that DRIPs can be
unfavorable both for shareholders who hold a large stake in the firm as well as for insiders,
because a DRIP has the potential of diluting their influence in the firm. As such, the insider
ownership percentage as stated in the database will still be used as a proxy to test the
hypothesis concerning insider shareholdings.
Financial Crisis
In order to research the extent to which, ceteris paribus, DRIP usage differs in crisis years as
compared to normal times, a crisis dummy is constructed. The overall consensus is that the
financial crisis began in the beginning of 2007 and ended in 2009 (Franzoni and Moussawi,
2012 and Flannery et al., 2013). Therefore the crisis dummy denotes the value of one for the
period 2007-2009 and zero otherwise.
Firm Size
In this paper, the total assets of a company will be used as a proxy for firm size. This proxy is
chosen because it is commonly used in academic literature; examples of DRIP related papers
in which the measure is used are Lasfer (1997) and Chiang et al. (2004).
Profitability
Three profitability measures will be used in this study to test whether firms with lower
profitability are more likely to provide shareholders with the possibility to participate in a
DRIP. The first one is the return on assets ratio, which has been previously used by Abraham
(2012) and Chiang et al. (2004) when researching DRIP firms. It is an indicator of the ability
and efficiency with which the management of the business is able to use the assets of the
company to generate profits. It is derived by dividing the yearly earnings of the firm
(Compustat item 18: IB) by the total assets (item 6:AT). The second proxy is the Price
Earnings ratio, which has also been previously applied by Chiang et al. (2004). It is calculated
by dividing the share price by the earnings per share (Compustat item 53: EPSPI). Lastly, the
net profit margin will be used following Hwang and Kim (2011). It is an indicator of the
ability of the management to turn sales into earnings available for the stockholders. It is
obtained from the AAII Stock Investor Pro database and can be derived by taking the income
before extraordinary items (item 18: IB) of the firm and dividing it by the sales of the firm
(item 12: sale).
Risk
The beta of the stock of the firm indicates the systematic risk of the firm. Following Chiang
(2004), it will be used to test whether more volatile firms are more probable to use a DRIP.
Beta was collected from Compustat.
5. Results
In the following part of the paper, the findings of the statistical analyses will be presented with
the purpose of investigating the hypotheses and answering the research question. The outline
of the discussion is as follows. First, the summary statistics will be provided for the firm
characteristics which will be used in this study. Subsequently, the findings of the univariate
analysis will be presented in which specific subsamples of firms with and without DRIPs are
investigated. What follows is the discussion of the results of the multivariate linear probability
regressions. Lastly, the results of the linear probability regressions, which investigate how the
usage of specific DRIP features differs among the sample of DRIP offering firms, will be
provided.
5.1 Summary statistics
The study is conducted based on a ten-year unbalanced panel data set with 30921 firm-year
observations. The sample covers the period 2003-2012. Panel A of table 1 presents for each
year in the sample the number of dividend paying firms that offer a DRIP, the number of
dividend paying firms that do not offer a DRIP and the number of non-dividend paying firms.
In panel B, a specific distinction is made between the pre-crisis and crisis period. Only the
before and during the crisis periods are compared, because it is likely that DRIPs are “sticky”,
which implies that once a firm initiates the plan it is likely to keep it. The period 2003-2006 is
defined as the pre-crisis period and the years 2007-2009 form the crisis period. The average
number of DRIP firms, dividend paying non-DRIP firms and non-dividend paying firms, as
well as the numbers expressed in percentages, are stated for both periods. As the table shows,
the percentage of DRIP offering firms has increased from 12% to 15% when comparing the
before crisis to the crisis period. In addition, the percentage of dividend paying firms
without the plans has decreased; from 30% prior to 26% during the crisis while the number
of non-dividend paying firms has remained approximately equal. The results provide
evidence that more dividend reinvestment plans were used during the crisis and provide
support for hypothesis 11.
Table 2 presents a list of the summary statistics of the firm characteristic variables that
are used in the analysis of this paper. All firm-year observations have some missing
observations for certain variables. However, for each firm characteristic variable used there
are still upwards of 21250 observations over the total sample period, which is considerably
large enough to draw valid conclusions. The variables can be considered to lie in a reasonable
range. The return on assets ratio and net profit margin, which have means close to zero, can be
considered somewhat on the low side, however, the numbers found are similar to previous
research such as the study Abraham (2012).
5.2 Univariate analysis; DRIP firms vs. non-DRIP firms
Univariate analyses are applied in order to test whether significant differences exist between
DRIP firms and the total sample of non-DRIP firms. When significant mean differences are
found this indicates that companies with and without DRIPs are different. Both the pre-crisis
year 2005 and the crisis year 2008 are investigated, in order to not only examine whether
DRIP and non-DRIP firms are significantly different, but also whether the macro-economic
conditions influence which types of firms offer dividend reinvestment plans. The results can
be found in Table 3 and 4.
Some evidence is found in favor of hypothesis 1 that DRIP firms are more
financially constrained than non-DRIP firms. For both years the WW and KZ indices were
higher for DRIP firms, however not all mean differences were significant. To be specific, in
2005, the WW index was slightly higher for DRIP firms (0.0171), however this difference
was insignificant. The mean difference in the KZ index for that year was statistically
significant at the 1% level and also substantial in size, namely 0.2399. For 2008, the mean
differences for the WW and KZ index between DRIP and non-DRIP firms were respectively
0.0707 and 0.0448 but only the mean difference in WW was statistically significant (at the 5%
level).
The log of Tobin's Q is 0.1878 lower for DRIP firms as compared to non-DRIP firms
in 2005 (significant at the 1% level) and is 0.0301 higher for them in 2008, but this latter
mean difference is not significant. However, no meaningful conclusions can be drawn
because when it comes to growth-opportunities, it is essential to condition on firms that
already pay dividends. Namely, only dividend paying firms are able to offer a DRIP, and
dividend paying firms generally have fewer growth opportunities compared to non-dividend
paying firms. This specific distinction is therefore further investigated in section 5.2.2.
When investigating the debt hypothesis and the hypothesis concerning the payout
ratio, the findings are as hypothesized. Namely, it can be seen that DRIP firms have on
average a 0.1613 higher Long Term Debt to Assets ratio for 2005 and 0.1080 for 2008, both
significant at 1%. Moreover, they have a 0.3373 and 0.2790 higher payout ratio, respectively
for the pre-crisis and crisis year. These mean differences are also significant at the 1% level.
Evidence is also found supporting the hypothesis concerning the liquidity of DRIP
firms. When comparing the current ratio of DRIP firms with non-DRIP firms, I find that the
current ratio of DRIP firms is 1.6358 lower than that of non-DRIP firms in 2005, and this
mean difference is even more substantial during the crisis when it is -2.5290. Both mean
differences are significant at the 5% level. The findings thus provide strong support that DRIP
firms are less liquid.
Mixed evidence is found concerning the betas of DRIP offering firms. Namely,
DRIP firms have lower betas in 2005 (the mean difference is -0.3528) while higher betas in
2008 (a mean difference of 1.1481), both significant at the 1% level. This indicates that the
volatility of the stock of DRIP businesses is lower during normal times, but higher during the
crisis period.
The findings are mixed concerning the profitability hypothesis. It was hypothesized
that DRIP firms had a lower profitability than non-DRIP firms. The price earnings ratio is
indeed lower for DRIP offering businesses. To be specific the PE ratio of DRIP firms in the
sample is 0.1240 lower than non-DRIP businesses in 2005 and 0.0457 in 2008 (significant at
1% and 5% respectively). However, I surprisingly find that DRIP firms do have a higher
return on assets ratio and net profit margin at the 1% significance level. Namely, for 2005, the
mean differences in these firm characteristic variables are respectively 0.0699 and 0.1923 and
for 2008 they are 0.0935 and 0.2159.
Support is found for the size hypothesis; the univariate analyses performed for both
years confirm that DRIP firms are on average larger. Namely, the mean differences in total
assets are substantial and significant at the 1% level for both years. Specifically, the total
value of the assets of DRIP firms is on average 14801 million dollar higher than that of nonDRIP firms in 2005 and 16892 million dollar in 2008. However, by looking at the total
sample of firms, no particular distinction can be made between the life-cycle theory effect and
the economies-of-scale influence. Therefore it is essential to further investigate only the
sample of dividend paying firms. This analysis is provided in section 5.2.2.
The mean differences concerning insider and institutional ownership are also
confirmed with significant proof at 1% significance. The percentage of institutional holdings
is on average 18.3% higher for DRIP firms in 2005 and 4.6% in 2008. The percentage of
shares held by insiders is on average 14.3% lower for DRIP firms in 2005 and 7.4% in 2008.
5.3 Univariate analysis; subsamples
The previous univariate analysis, in which a general distinction is made between DRIP and
non-DRIP firms, is usually applied in the studies in which the characteristics of DRIP offering
businesses have been investigated. The sample of companies, which do not offer a DRIP,
consists both of dividend paying firms without a DRIP and non-dividend paying firms.
However, the firm characteristics of these firms can substantially differ which could
potentially influence the results in section 5.2.1. Companies first make the decision to start
paying part of their earnings as dividends and subsequently they can decide to also offer a
dividend reinvestment plan. This implies that DRIP offering businesses have firm
characteristics which are specific for dividend offering firms. For example, Fama and French
(2001) found that dividend-paying firms are on average more profitable, have fewer
opportunities for future growth and have a considerably larger size than non-dividend paying
firms. This could potentially skew the mean difference analysis performed in section 5.2.1,
therefore it is important to also perform the analysis while making a specific distinction
between dividend and non-dividend paying businesses. By splitting the sample of non-DRIP
firms into dividend offering businesses without DRIP and non-dividend companies, a specific
distinction can be made between the dividend impact and the DRIP influence. Only
Saporochenko (1998) has previously also made this distinction when investigating DRIP
firms.
Table 5 and 6 show the results of mean comparison analyses for three subsamples,
namely, between DRIP firms, firms that pay dividends but do not offer a DRIP and nondividend paying firms. The univariate analyses are again performed for the pre-crisis year
2005 and the crisis year 2008. Concerning the hypotheses investigated in this paper, the
comparison between DRIP offering firms and firms that pay shareholders a dividend but do
not offer a DRIP is especially important.
The mean comparison results in Panel B of Table 5 provide some support that DRIP
firms are more financially constrained than their non-DRIP but dividend paying counterparts.
Although in the pre-crisis year, the WW index is only slightly higher (0.0155) and
insignificant, the KZ index is substantially higher for DRIP firms (0.8066). In the crisis year,
DRIP offering firms are even more financially constrained than the dividend paying nonDRIP firms. The mean difference for the WW index is 0.1078 and for the KZ index it is
0.9045 and both are significant at the 1% level. Hypothesis 1 is therefore again supported.
It is found that the natural logarithm of Tobin’s Q, used as a proxy for future growth
opportunities, is -0.1183 lower for DRIP firms than for dividend paying firms without the
plans in 2005 (significant at 1%). During normal times, DRIP firms thus had fewer growth
opportunities than dividend paying firms without the plan. This is surprisingly because it was
expected that firms could use DRIPs in to finance future growth opportunities with lower
negative signaling consequences then when using equity. During the financial crisis, the
expected positive mean difference for the growth proxy was found. However, the size of the
mean difference (0.0443) was not very substantial and only significant at the 10% level. The
significant negative mean differences of -1.056 and -0.0202 respectively for 2005 and 2008
when comparing dividend paying firms without DRIP with non-dividend paying firms are as
expected since firms that pay dividends generally have lower future growth opportunities.
In the non-crisis year, DRIP firms have significantly higher debt levels. When
comparing the Long Term Debt to Assets ratios of DRIP firms with dividend paying business
without the plans and non-dividend paying firm, mean differences of respectively 0.1094 and
0.1885 are found for 2005 (significant at the 1% level). This supports hypothesis 3 that DRIP
firms are more highly leveraged. In the crisis year 2008, the mean difference in the debt ratio
between the DRIP and non-DRIP firms of the dividend paying subsample is zero and also not
significant. However, DRIP firms do have more leveraged capital structures than nondividend paying firms in this year.
In 2005, DRIP firms had slightly higher payout ratios than dividend paying non-DRIP
firms (the mean difference is 0.0758), however the difference was not significant. In 2008 the
payout ratio of DRIP firms was slightly lower than dividend-paying non-DRIPs (-0.0645)
providing evidence against hypothesis 4 that DRIP firms have higher payout ratios. The
evidence however is not very strong because the mean difference was only significant at the
10% level.
The findings also provide some evidence that DRIP firms are considerably more
illiquid than dividend-paying non-DRIP firms during a crisis. The mean difference of the
current ratio between said samples is -2.7794 in the crisis year 2008, and was significant at
the 1% level. In the pre-crisis year 2005 the difference was -1.1272 however it was
insignificant. When comparing DRIP firms with non-dividend paying firms, it is found that
they are significantly more illiquid at the 1% level for both the pre-crisis and crisis years.
When examining the profitability of the firms in the sample again mixed findings are
obtained. As explained in the hypothesis part of this paper, DRIP firms were hypothesized to
be less profitable than firms without the plans. It was found that DRIP firms did have lower
PE ratio when comparing them with dividend paying non-DRIP firms in 2005. But this
finding was only significant at 10%. When these subsamples were compared in 2008, it was
found that DRIP firms had higher PE ratios albeit the t-statistics were insignificant. For both
years, the PE ratios of DRIP firms were significantly lower at the 1% level when comparing
them with non-dividend paying firms. Surprisingly, DRIP firms have the highest return on
assets ratio and the highest net profit margin when comparing them both to the samples of
both the dividend and non-dividend paying firms. The mean differences when comparing with
the non-dividend paying firms were all significant at 1% however, when comparing with the
dividend paying firms the significance of the findings was less convincing. The mean
difference in return on assets ratio for 2005 was insignificant but in 2008 it was significant at
the 5% level. For the net profit margin the mean difference was significant at 5% in 2005 and
10% in 2008. Overall, the findings concerning return on assets ratio and the net profit market
can indicate that DRIP firms have a high level of efficiency with which they are able to turn
sales into earnings and use the assets of the firm to generate profits.
Some proof is found for hypothesis 7, that firms with less volatile stock (lower betas)
more often have as DRIP. Although the mean difference between DRIP and dividend-paying
non-DRIP firms of -0.0356, for the year 2005, is not significant, the mean difference of
-0.1506 found for 2008 is significant at the 1% level. The findings presented in Table 5 and 6
also indicate that non-dividend paying firms have significantly higher betas when comparing
them with (both non-DRIP and DRIP) dividend paying firms. This is as expected because
when firms start to pay cash dividends this generally reveals that the riskiness of their
earnings and cash flows has profoundly reduced (Dyl and Weigand, 1998). The management
of a firm usually does not initiate a dividend if earnings have only increased temporarily.
Businesses usually consider it a right moment to offer a dividend when a firm has become
mature and its earnings have considerably stabilized. According to Dyl and Weigand (1998),
these firms are generally less risky.
Firms that offer their investors the option to participate in a DRIP are considerably
larger in size than dividend paying firms without the plans. The mean difference is 10380.99
million US dollar. When comparing DRIP firms with non-dividend paying firms the
difference is even 16014.60 million. Both findings are significant at the 1% level.
DRIP firms have substantially lower insider ownership percentages when comparing
them both with the sample of dividend paying businesses without DRIPs and the sample of
non-dividend firms. To be specific, when comparing the aforementioned samples, the insider
ownership percentages are 16.29% and 13.23% lower for DRIP firms in 2005. In the crisis
year 2008, these percentages were respectively 10.15% and 6.17% lower. All findings were
significant at the 1% level. The hypothesis concerning insider ownership is thereby strongly
confirmed. When the management owns a large percentage of shares in the firm it is less
willing to implement a DRIP because it can dilute their voting power. Moreover, the large
inside ownership stake makes the firm less prone for hostile takeovers, which reduced its need
of firms to use a DRIP as an antitakeover provision. Also strong proof is found for the
institutional ownership hypothesis. When looking at dividend paying firms, DRIP companies
have a 20.32% higher mean institutional ownership percentage in 2005. In 2008, this
percentage was 4,76% and is thus less high than during normal times but is still substantial.
Moreover, when comparing DRIP firms with non-dividend paying businesses, the percentage
of shares held by institutions is 17.29% higher in 2005 and 4.61% in 2008. The mean
differences concerning institutional holdings were all found to be significant at the 1% level.
5.4 Multivariate analysis; DRIP usage
A multivariate analysis is executed in order to investigate the joint influence which the various firm
characteristics can have on the offering of dividend reinvestment plan by businesses. In order to
determine the likelihood that a company adopts a DRIP a linear probability model is used
as the multivariate analysis.
The linear probability model is:
𝐷𝑅𝐼𝑃!" = 𝛽! + 𝛽! 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑡𝑟𝑎𝑖𝑛𝑒𝑑 𝑚𝑒𝑎𝑠𝑢𝑟𝑒!" + 𝛽! 𝐺𝑟𝑜𝑤𝑡ℎ!" + 𝛽! 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒!" +
𝛽! 𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜!" + 𝛽! 𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦!" + 𝛽! 𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦!" + 𝛽! 𝑆𝑖𝑧𝑒!" + 𝛽! 𝐼𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝!" + 𝛽! 𝐼𝑛𝑠𝑖𝑑𝑒𝑟 𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝!" + 𝛽!" 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑐𝑟𝑖𝑠𝑖𝑠 𝑑𝑢𝑚𝑚𝑦 + 𝜀
The results of the linear probability models are presented in Table 7. In columns 1 and 2, the
dependent variable indicates 1 if a company has a DRIP and 0 if it does not offer a DRIP.
In columns 3 and 4, the analysis is applied only for the dividend paying firms. As such,
the dependent variable is 1 if a firm offers a DRIP and 0 if a dividend paying firm does
not offer a reinvestment plan. The set of potential determinants is regressed on the
probability that the firm has a DRIP. The coefficients on the regressors indicate the change in
the probability that the dependent variable is 1, given a unit change in the firm characteristic.
The coefficients are estimated by OLS. For each firm in the dataset, there are yearly
observations over the sample period for the firm characteristics. However, because the firm
characteristics do not change randomly across these years, they are serially correlated.
Because the data varies across the firms but is unlikely to vary considerably over time, fixed
effects regressions are applied. Standard errors also need to be corrected for autocorrelation
and for potential heteroskedasticity. Clustered standard errors are therefore used because they
are valid even if there is heteroskedasticity, autocorrelation or both (Stock and Watson, 2011).
As the results in table 7 indicate, both when investigating the total sample of firms
and the subsample with only dividend paying businesses, positive coefficients on the WW and
KZ index are found, however, none of them are significant. So the results fail to provide
strong support for the hypothesis that more financially constrained firms are more likely to
offer a DRIP.
Surprisingly, strong support is found against the hypothesis that firms that offer a
DRIP have more growth opportunities than dividend-paying firms who do not offer the plans.
As columns 3 and 4 indicate, the probability that a dividend-paying firm offers a DRIP
decreases by about 0.743% in the regression with the WW index and 1.209% in the regression
with the KZ index, for a 0.1 increase in the natural logarithm of Tobin’s Q. Both findings are
significant at the 1% level. It can therefore be concluded that dividend-paying businesses with
fewer growth opportunities are more likely to initiate a dividend reinvestment plan.
The coefficient on the Long Term Debt to Assets ratio is positive in all the
regressions. However, it is only significant (at the 10% level) in the linear probability model
where the KZ index is used and among the total sample of firms.
No evidence is found to support either the hypothesis concerning the payout ratio and
the liquidity of businesses because the findings were all statistically insignificant.
Also surprisingly, is the finding that coefficients on the profitability proxies were all
positive, albeit not all statistically significant. For example, all coefficients on the PE ratio
were insignificant. When applying the linear probability model with the WW index, I find that
a 0.1 increase in the return on assets of a business increases the likelihood that a firm offers a
DRIP with approximately 1.269%. Among the dividend-paying firms this percentage is even
more substantial, namely 2.973%. Both results are statistically significant at the 1% level.
Moreover, when investigating the linear probability model with the KZ index, I find that a
one-unit increase in the net profit margin of a firm increases the likelihood that a firm offers a
DRIP with approximately 0.72%. However, the latter finding is only significant at a 10%
significance level.
Another finding, which is opposed to the hypothesis, is that firms with more
volatile stock have a higher probability of implementing a dividend reinvestment plan. The
coefficients on beta are significant for both the total sample and the sample of dividend
paying firms but are only in the linear probability models where WW is used. In the
regressions with WW, by increasing beta with 0.1, the likelihood that a firm offers a DRIP
increases with 0.10% (significant at the 10% level). For dividend paying firms this
percentage is even higher 0.391% (significant at the 1% level). Dammon and Spatt (1992)
claim that a DRIP can be treated as an option. Namely, investors can at any point in time
decide whether to receive their dividends in cash or in shares. This option becomes more
valuable for investors when there is more volatility in the stock price. Investors are more
likely to participate in the plan when the price is low because they can buy more shares and
have their dividends paid in cash when the price is high. Just as with options, a DRIP
therefore can be considered more valuable for investors when the underlying stock price is
more volatile. Because of this advantage, riskier firms with more volatile stocks might be
able to attract more participants and as such collect a larger amount of cash through the plan.
This can be a potential explanation why firms with higher betas are more likely to offer a
plan.
Positive coefficients on total assets, significant at the 5% level, were found when
investigating both the total sample and the sample of dividend paying firms. However, the
percentage increase in the likelihood of DRIP usage by firms is close to zero for a one million
dollar increase in total assets. Therefore, little support is found in favor of the hypothesis that
larger firms are more likely to offer DRIPs.
Very strong support is found for the hypothesis concerning the percentage of insider
shareholdings in the firm. A ten percent increase in insider ownership of the firm results in a
0.44% lower probability that a firm offers a DRIP in the total sample and 0.89% among the
dividend paying businesses, when the linear probability model with the WW index is used.
Both percentages are significant at 5%. When the regression with the KZ index is used, the
percentages are respectively 0.74% and 0.14%, statistically significant at 1%.
When testing the hypothesis about the percentage of institutional shareholdings, the
only significant coefficient is found in the regression with the WW index among the dividendpaying companies. The results show that in this sample, a 10% increase in institutional
ownership results in a 0.71% increase in the probability that a firm which already pays
dividends, starts offering a DRIP. However, this finding is only significant at the 10% level
thereby providing only minor support in favor of the institutional shareholdings hypothesis.
As hypothesized the coefficient on the dividend dummy is significantly positive for
both samples, which implicates that firms are more likely to offer a DRIP in the financial
crisis. In the total sample of firms, evidence is found that during a crisis the likelihood of
DRIP usage increases with respectively 2.04 % or 3.42% (in the regression with respectively
the WW and KZ index). Among the dividend paying firms the percentages are slightly higher,
namely 2.08% and 4.27%.
The interaction term between the Crisis dummy and the financial constraints indices
are used to investigate whether more financially constrained firms during a crisis are more
likely to offer a dividend reinvestment plan. Because only the firms that already pay a
dividend can ease their financial situation by the initiation of a DRIP, it is valuable to only
look at this subsample. The hypothesized relationship was found among the sample of
dividend paying firms, though only in the regression with the KZ index. Firms that paid
dividends and had a one unit higher KZ index in the financial crisis had a 2.14% higher
probability of offering a DRIP. However this result was only significant at the 10% level.
5.5 Multivariate analysis; DRIP features
Linear probability models are also applied for various DRIP features in order to investigate
how the usage of specific Dividend Reinvestment Plan features differs among the sample of
DRIP offering firms. The model specification is:
𝐷𝑅𝐼𝑃 𝐹𝑒𝑎𝑡𝑢𝑟𝑒 = 𝛽! + 𝛽! 𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑡𝑟𝑎𝑖𝑛𝑒𝑑 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 + 𝛽! 𝐺𝑟𝑜𝑤𝑡ℎ + 𝛽! 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 +
𝛽! 𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 𝛽! 𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 + 𝛽! 𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 + 𝛽! 𝑆𝑖𝑧𝑒 + 𝛽! 𝐼𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 + 𝛽! 𝐼𝑛𝑠𝑖𝑑𝑒𝑟 𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 + 𝜀
DRIP Feature is a binary variable which indicates 1 if the company offers a particular DRIP
feature. The features that will be investigated are the discount feature, the partial reinvestment
option, the cash option and the direct purchase option. They have been detailed described in
part 3.2 of the hypothesis section of this paper.
Table 8 shows the result of the multivariate analysis. The various significant results
provided in the table show that firm characteristics substantially influence the usage of
specific DRIP features.
The table shows the coefficients on the firm-characteristic regressors used in the
linear probability models as well as the associated t-statistics and their significance. Some
evidence is found that more financially constrained firms are more likely to offer the cash
option. Namely, when the WW index is used as the financial constrained measure, a one unit
increase in this index results in a 6.96% increase in the likelihood that a DRIP firm offers the
cash option. This finding is significant at the 1% level. Because financially constrained DRIP
firms have difficulties in obtaining funding, it is very plausible that they use the cash option to
raise additional amounts of funds. However, when looking at financially constrained DRIP
firms in a financial crisis, no significant influence was found of a one-unit increase in either of
the two financial constrained indices on the probability of a firm offering any of the specific
DRIP features.
Significant coefficients on the natural logarithm of Tobin’s Q show that firms with
more growth opportunities are more likely to offer a discount or the partial reinvestment
option. It is plausible that these firms try to make participating in the plan more attractive by
offering plan participants a discount and by providing them with the option to only partially
reinvest their dividends. However, the findings show that they are also less likely to offer the
cash option and direct investment option. This is surprising because firms could use the cash
and direct investment options to obtain additional financing to fund their growth opportunities.
Firms with more growth opportunities are also less intended to charge a service fee.
Firms with higher levels of debt, as measured by the long-term debt to total assets ratio,
are considerably more likely to offer the direct investment option. When measured with the
WW index, the percentage increases with 1,95% and with the KZ index with 2.22% for a 0.1
increase in the debt ratio. Both results are significant at the 1% level. In addition, they are also
significantly more likely to charge a service fee (at the 10% or 5%, depending respectively on
the use of the WW and KZ proxy).
The payout ratio of the firm only has a significantly positive effect on the probability
that a business charges a service fee. Namely, the likelihood of charging a service fee is
increased with 0.37% with a 0.1 increase in payout ratio. Hence, the results indicate that DRIP
offering firms which pay large amounts of dividends relative to their earnings, are more likely
to charge investors with a service fee. However, the finding is only significant at the 10%
level and when the KZ index is used to measure financial constraints.
When DRIP firms have higher return on assets, this increases the likelihood that they
charge a service fee and offer the cash option. However the discount and partial reinvestment
options are less often offered (the findings however are often only significant in either the
regression with the KZ index or the WW index). Firms with higher price earnings ratios are
more likely to offer the partial and direct investment options, however the findings are only
significant at the 10% and 5% level respectively and only in the regression where the KZ
index is used. The size of the net profit margin has a negative influence on the likelihood of a
firm charging a service fee (significant at 5%, though only in the regression with the KZ index)
and a positive effect on the probability of a business to offer the cash option (though only
significant at 5% in the WW index regression).
Firms that have more volatile stock are considerably more likely to charge a service
fee. A 0.1 increase in beta increases the probability that a DRIP firm offers a service fee with
1.38% with the WW index or 1.0% with the KZ index, significant at 1%. The higher the
firm’s beta, the less likely it also is to offer partial reinvestment option and the direct
investment option, however the impact is only small. A 0.1 increase in beta does increase the
likelihood that the cash option is provided with 1.42%, however this is only significant (at the
1% level), in the model where the KZ index is used.
Proof is found that more illiquid firms are more likely to charge a service fee. The
percentages found are significant at the 1% level although very small in size. Namely, a 0.1
unit decrease in the current ratio increase the probability of a business charging a service fee
with either 0.016% (in the linear probability model with the WW index) or 0.027% (in the
regression with the KZ proxy).
The influence of the size of the firm as proxied by total assets can be considered
negligible. The coefficient on total assets was approximately zero for each DRIP feature that
was researched.
The percentage of insider ownership has a positive influence on the likelihood of a
firm offers the partial reinvestment option and a negative effect on the probability that a
service fee is charged. In addition, it negatively influences the offering of a cash and direct
investment option, but only in the regression where the WW index is used as the financial
constraint. When firms have a higher percentage of institutional ownership they are
significantly more likely to charge a service fee. The cash option is also more often provided,
albeit this finding is only significant in the regression with the WW index.
The results in table 7 also show that in a crisis the likelihood that a firm provides
investors with a discount is significantly reduced (with 8.21% in the regression with the WW
index and 7.91% in the regression with the KZ index). Although offering a discount can make
participating in the plan more attractive for shareholders, Finnerty (1989) showed that it does
increase the cost of capital, since this can be especially unappealing during a crisis, it is
understandable why a discount is less often offered during these times. In addition, there is
convincing evidence, that during a crisis, firms more often offer investors the option to make
additional investments in the stock of the company but they are also more likely to charge
them a service fee. The direct investment option, on the other hand, is less often offered.
6. Conclusion
Dividend reinvestment plans can be valuable for companies because they can be used to raise
additional equity, improve the shareholder relations, reduce stock volatility, broaden the
shareholder base and the institution of the plan can signal to the market that the management
has positive expectations about the future earnings of the business. Some disadvantages are a
reduction in market disciplining and potential earnings per share dilution and free cash flow
problems.
That not every business establishes a DRIP can indicate that some firms benefit more
from offering the plan than others. This study therefore investigates which firm characteristics
affect why some businesses favor to distribute dividends as shares as opposed to paying them
in cash. The sample period used, from 2003 to 2012, covered the recent financial crisis.
Therefore, it was possible to also investigate whether DRIP usage differs when comparing
normal times and times of financial instability.
Mean difference analysis were applied to investigate how DRIP firms differed
between the total sample of firms who do not offer the plans and the sample of dividend
paying non-DRIP businesses. Some evidence was found that the firms that offered DRIPs
were more financially constrained, were more highly leveraged and were considerably more
illiquid and larger in size. Also their percentage of insider ownership was lower and the
fraction of institutional investors substantially higher. These findings were all in line with the
hypotheses. DRIP firms also had significantly higher payout ratios than non-DRIP firms,
however, when comparing them with only the dividend paying firms without the plans, the
findings were mixed. The univariate analysis also provided mixed results concerning the
volatility of the stock of DRIP offering firms, their growth opportunities and profitability. In
the pre-crisis year 2005 DRIP firms were found to have lower betas while in the crisis year
2008 their average beta was higher than non-DRIP firms. Among the dividend paying firms,
the betas of DRIP businesses were in both years higher but only significant in 2008.
Surprisingly, during normal times DRIP firms had fewer growth opportunities than dividend
paying firms without the plan, which was not in line with the hypothesis, while during crisis
times they had more future growth opportunities. While the PE ratios were generally lower for
DRIP firms, providing evidence in favor of the hypothesis that DRIP firms are less profitable,
surprisingly also strong evidence is found that the sample of DRIP firms have higher returns
on assets and a higher net profit margin, both when comparing them to all non-DRIP firms
and only the dividend paying ones.
Linear probability models were used to investigate how proxies for the firm factors
influenced the probability that a business offers a DRIP. The findings provided some support
in favor of the hypotheses that more leveraged firms and businesses with a larger share of
institutional shareholdings and a lower percentage of insider ownership were more likely to
offer a DRIP. Strong support was found against the hypothesis that dividend-paying firms
with more growth opportunities are more likely to offer a DRIP. Namely, the size of the
natural logarithm of Tobin’s Q was actually significantly lower than the probability that a
business provides the plan. Also, opposed to what was hypothesized, some of the findings
show that firms with higher return on assets ratios and net profit margins are more likely to
offer DRIPs, which indicates that a firm’s profitability actually positively affects DRIP usage.
Strong support was found that firms are more likely to offer a DRIP during a crisis.
Namely, the average number of DRIP offering firms in the sample expressed in percentages
increased from 12% to 15% when comparing the before crisis to the crisis period. Moreover,
the linear probability models also showed that during a crisis the probability that a firm
offers a DRIP increases substantially.
Strong evidence was found that there is substantial heterogeneity among DRIP using
firms. Namely, firm characteristics can considerably influence which specific DRIP features
are offered to investors. An interesting focus point was to research whether firms with
relatively higher capital needs were more likely to offer certain features. An interesting
finding was for example that more financially constrained firms are more likely to offer the
cash option. Also firms with higher debt ratios are more likely to use the direct investment
option. It is likely that by offering these features, firms can raise more funds which is
appealing for constrained or more highly leveraged firms. Another interesting outcome was
that more indebted firms and companies with less growth opportunities, a higher payout ratio
and more volatile stock were also more likely to charge investors with a service fee. This
suggests that firms use the service fee too, in order to increase the amount of funds raised.
Lastly, an interesting outcomes was that firms with fewer growth opportunities are less likely
to offer a discount and more likely to offer the cash and direct investment option.
7. Recommendations
This study contributed to the literature because new intuitions were obtained on how
companies that offer dividend reinvestment plans differ from firms that do not offer their
investors the option to reinvest their dividends. There are several topics related to this study
which would be interesting to investigate in future research. A drawback of this study is that
no information was obtained which indicated whether the DRIP was a market plan or a newissue plan. It is therefore suggested that future analyses obtain data in which this specific
distinction is made. For example, surveys could be send to the managers of DRIP offering
firms, not only to discover which types of plans are used but also to further investigate the
reasons behind the adoption of the specific DRIP features which were investigated in this
study. Lastly, it would be interesting to examine the amounts of funds that are yearly raised
through DRIPs. The studies that have attempted to create an estimate in the past can be
considered outdated so their findings are likely not valid anymore.
8. Reference list
Abraham, M. (2012). Determinants of a Firm's Decision to adopt a Dividend Reinvestment
Plan: Australian Evidence.
Almeida, H., & Campello, M. (2010) Financing Frictions and the Substitution Between
Internal and External Funds. Journal of Financial and Quantitative Analysis, Vol. 45, pp.
589-622.
Almeida, H., Campello, M., & Weisbach, M. S. (2004) The Cash Flow Sensitivity of Cash.
The Journal of Finance, Vol. LIX, No. 4.
American Association of Individual Investors. (2000). The individual investor's Guide to
Dividend Reinvestment Plans. Vol. 8
American Association of Individual Investors. Stock Investor Pro, accessed 6 July 2014,
<http://www.aaii.com/stock-investor-pro>
Anderson, R. H. (1986). Dividend reinvestment and Australian companies. Professional
Administrator, Vol. 38, No. 3, pp. 46-47.
Asquith, P., & Mullins Jr, D. W. (1986). Equity issues and offering dilution. Journal of
Financial Economics, Vol. 15, No. 1, pp. 61-89.
Baker, H. K., Khan, W. A., & Mukherjee, T. K. (2002). Direct Investing: The Role of Stock
Purchase Plans. Financial Services Review, Vol. 11, pp. 47-63.
Baker, H. K. (2009). Dividends and dividend policy. John Wiley & Sons.
Berkman. H., & Koch, P. D. (2012). Drained by DRIPs: The Hidden Cost of Buying on the
Dividend Pay Date. Available at SSRN 2172448.
Berkman, H., & Koch, P. D. (2013). DRIPs and the Dividend Pay Date Effect.
Bernanke, B. S. (1993). Credit in the Macroeconomy. Quarterly Review-Federal Reserve
Bank of New York, Vol. 18, pp. 50-70.
Bhattacharya, S. (1979). Imperfect information, dividend policy, and “the bird in the hand"
fallacy. The Bell Journal of Economics, pp. 259-270.
Bodnaruk, A., & Östberg, P. (2013). The shareholder base and payout policy. Journal of
Financial and Quantitative Analysis, Vol. 48, No. 3, pp. 729-760.
Boehm, T. P., & DeGennaro, R. P. (2007). A discrete choice model of dividend reinvestment
plans: classification and prediction. Working Paper, Federal Reserve Bank of Atlanta.
Booth, J., Smith, R., 1986. Capital raising, underwriting, and the certification hypothesis.
Journal of Financial Economics, Vol. 15, pp. 261-280.
Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity.
Review of Financial Studies, Vol. 22, No. 6, pp. 2201-2238
Bruno, M., & Sachs, J. (1982). Input price shocks and the slowdown in economic growth: the
case of UK manufacturing. The Review of Economic Studies, Vol. 49, No. 5, pp. 679-705.
Campello, M., Graham, J. R., & Harvey, C. R. (2010). The real effects of financial constraints:
Evidence from a financial crisis. Journal of Financial Economics. Vol. 97, No. 3, pp. 470-487.
Carlson, C. B. (1996). Buying stocks without a broker. New York: McGraw-Hill.
Chang, O. H., & Nichols, D. R. (1992). Tax incentives and capital structures: The case of the
dividend reinvestment plan. Journal of Accounting Research, pp. 109-125.
Chan, K. K. W., McColough, D. W., & Skully, M. T. (1993). Australian tax changes and
dividend reinvestment announcement effects: A pre- and post-imputation study. AustraIian
Journal of Management, Vol. 18, pp. 41-62.
Chan, K.W., McColough, D.W., & Skully, M. T. (1996). Australian dividend reinvestment
plans: an event study on discount rates. Applied Financial Economics, Vol. 6, pp. 551-561
Cherin, A. C., & Hanson, R. C. (1995). Dividend reinvestment plans: A review of the
literature. Financial Markets, Institutions and Instruments, Vol. 4, pp. 59-73.
Chiang. K., Frankfurter. G. M., & Kosedag. A. (2004). Exploratory analyses of dividend
reinvestment plans and some comparisons. International Review of Financial Analysis, Vol.
14, No. 5, pp. 570-586.
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, Vol.
47, pp. 331-348.
Davey. P. J. (1976). Dividend reinvestment progrxfams. Conference Board in Canada.
DeAngelo, H., & DeAngelo, L. (2007). Payout policy pedagogy: what matters and why.
European Financial Management, Vol. 13, No. 1, pp.11-27.
DeGennaro, R. P. (2003). Direct investments in securities: A primer. Economic ReviewFederal Reserve Bank of Atlanta, Vol. 88, No. 1, pp. 1-14.
Denis, D. J., & Sibilkov, V. (2009). Financial constraints, investment, and the value of cash
holdings. Review of Financial Studies, pp. 0-31
Dhillon, U. S., Dennis, J. L., & Ramirez, G. G. (1992). Dividend reinvestment plans: an
empirical analysis. Review of Quantitative Finance and Accounting, Vol. 2, pp. 205-213.
Dubofsky, D. A., & Bierman, L. (1988). The effect of discount dividend reinvestment plan
announcements on equity value. Akron Business and Economic Review, Vol. 19, No. 2, pp.
58-68.
Duchin, R., Ozbas, O., & Sensoy, B. A. (2010). Costly external finance, corporate
investment, and the subprime mortgage credit crisis. Journal of Financial Economics, Vol.
97, No. 3, pp. 418-435.
Dyl, E. A., & Weigand, R. A. (1998). The information content of dividend initiations:
Additional evidence. Financial Management, pp. 27-35.
Eckbo, B. E., & Masulis, R. W. (1992). Adverse selection and the rights offer paradox.
Journal of financial economics, Vol. 32, No. 3, pp. 293-332.
Enqvist. J., Graham. M., & Nikkinen. J. (2014). The impact of working capital management
on firm profitability in different business cycles: evidence from Finland. Research in
International Business and Finance, Vol. 32, pp. 36-49.
Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm characteristics or
lower propensity to pay?. Journal of Financial Economics, Vol. 60, No. 1, pp. 3-43.
Fazzari, S., Hubbard, R. G., & Petersen, B. C. (1988). Financing constraints and corporate
investment.
Fazzari, S. M., & Petersen, B. C. (1993). Working capital and fixed investment: new evidence
on financing constraints. The RAND Journal of Economics, pp. 328-342.
Finnerty, J. D. (1989). New issue dividend reinvestment plans and the cost of equity capital.
Journal of Business Research, Vol. 18, No. 2, pp. 127-139.
Flannery, M. J., Kwan, S. H., & Nimalendran, M. (2013). The 2007–2009 financial crisis and
bank opaqueness. Journal of Financial Intermediation, Vol. 22, No. 1, pp. 55-84.
Franzoni, F. I., & Moussawi, R. (2012). Hedge fund stock trading in the financial crisis of
2007–2009. Review of Financial Studies, Vol. 25, No. 1, pp. 1-54.
Fredman, A. J., & Nichols, J. R. (1982). Sizing up new capital dividend reinvestment plans.
California Management Review, Vol. 24, No. 4, pp. 77-84.
Friedman, B.M. (1996). Economic Implications of Changing Share Ownership. The Journal
of Portfolio Management, pp. 59-70.
Goktan, M. S., & Kieschnick, R. (2008). Wealth Effects of Antitakeover Provisions in
Mergers (Doctoral dissertation), University of Texas at Dallas.
Goshen, Z. (1995). Shareholder dividend options. Yale Law Journal, pp. 881-932.
Higgins, R. C. (1981). Sustainable growth under inflation. Financial Management, pp. 36-40.
Hwang, S., & Kim, W. (2011). Anti-Takeover Charter Amendments and Managerial
Entrenchment. KDI School of Public Policy Working Paper.
Ivashina, V., & Scharfstein, D. (2010). Bank lending during the financial crisis of 2008.
Journal of Financial economics, Vol. 97, No. 3, pp. 319-338.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The
American economic review, pp. 323-329.
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful
measures of financing constraints?. The Quarterly Journal of Economics, pp.169-215.
Keynes, J. M. (1936). The general theory of interest, employment and money.
Lamont. O., Polk. C., & Saa-Requejo, J. (2001). Financial constraints and stock returns.
Review of Financial Studies, Vol. 14, No. 2, pp. 529-554.
Lasfer, M. (1997). Scrip dividends: The Management’s view. European Financial
Management, Vol. 3, pp. 237-249.
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained
earnings, and taxes. The American Economic Review, pp. 97-113.
MacQuarrie, S. (1995). And now, direct to the public. Financial Executive, Vol. 11, pp. 3535.
Masulis, R. W., & Korwar, A. N. (1986). Seasoned equity offerings: An empirical
investigation. Journal of Financial Economics, Vol. 15, No. 1, pp. 91-118.
Mayo, H. (2010). Investments: An Introduction. Cengage Learning.
Miller, M. H., & Rock. K. (1985). Dividend policy under asymmetric information. The
Journal of Finance, Vol. 40, No. 4, pp. 1031-1051.
Modigliani, F., & Miller, M. H .(1961). Dividend policy, growth, and the valuation of shares.
The Journal of Business, Vol. 34, No. 4, pp. 411-433.
Mukherjee, T. K., Baker, H. K., & Hingorani, V. L. (2002). Why firms adopt and
discontinue new-issue dividend reinvestment plans. Journal of Economics and Finance, Vol.
26, No. 3, pp. 284-296.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics.
Vol. 5, No. 2, pp.147-175.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when
firms have information that investors do not have. Journal of Financial Economics, Vol. 13,
No. 2, pp. 187-221.
Opler, T., Pinkowtiz, L., Stulz, R., & R. Williamson. (1999). The Determinants and
Implications of Corporate Cash Holdings. Journal of Financial Economics, Vol. 52, No. 1, pp.
3-46.
Perumpral, S., Keown, A. J., & Pinkerton, J. (1991). Market reaction to the
formulation of automatic dividend reinvestment plans. Review of Business and Economic
Research, Vol. 26, pp. 48-58.
Peterson, P. P., Peterson, D. R., & Moore, N. H. (1987). The adoption of new-issue dividend
reinvestment plans and shareholder wealth. The Financial Review. Vol. 22, pp. 221-232.
Roden, F., & Stripling, T. (1996). Dividend reinvestment plans as efficient methods
of raising equity financing. Review of Financial Economics, Vol. 5, pp. 91-100.
Saporoschenko, A. (1998). Do dividend reinvestment plans contribute to industrial firm value
and efficiency?. Financial Services Review. Vol. 7, No. 4, pp. 273-289.
Scholes, M. S. & Wolfson, M. A. (1989). Decentralized investment banking: the case of
discount dividend- reinvestment and stock-purchase plans. Journal of Financial
Economics. Vol 23, pp. 7-35.
Seah, K. Y. (2011). Inflation Illusion and Institutional Ownership in REITs.
Smith Jr, C. W., & Watts, R. L. (1992). The investment opportunity set and corporate
financing, dividend, and compensation policies. Journal of financial Economics, 32(3), 263292.
Steinbart, P. J., & Swanson, Z. (1998). ‘No-load’dividend reinvestment plans. Review of
Financial Economics, Vol. 7, No. 2, pp. 121-141.
Stock J, Watson M. Introduction to Econometrics (3rd edition). (2011) Addison Wesley
Longman.
Tamule, H. B., Edward, L. B., & Sugrue, T. F. (1993). Dividend Reinvestment Plans and
Pecking Order Capital Structure Behavior: An Empirical Investigation. Journal of Economics
and Finance, No. 17, pp. 91-102.
Tinic, M. (1988). Anatomy of Initial Public Offerings of Common Stock. Journal of Finance.
No. 43, pp. 789-822.
Whited, T. M., & Wu, G. (2006). Financial constraints risk. Review of Financial Studies, Vol.
19, No. 2, pp. 531-559
White, L. J. (2014). A Close Connection between the Disciplines of Industrial Organization
and Finance: A Worthy Objective or a Bridge Too Far?. International Journal of the
Economics of Business, Vol. 21, No. 1, pp. 49-54.
Williamson, R., & Yang, J. (2013). Financial Constraints. Firm Structure and Acquisitions.
Zammit, S. (1995) Master Thesis, Monash University, Australia.
9. Appendix
Table I
Year
# Div. Firms with DRIP
Panel A
# Div. Firms without DRIP
# non-Div. Firms
Total
2003
334
784
1620
2738
2004
365
888
1729
2982
2005
365
961
1839
3165
2006
359
971
1908
3238
2007
358
1000
1913
3271
2008
556
797
1874
3227
2009
546
732
1852
3130
2010
547
803
1861
3211
2011
542
848
1691
3081
2012
556
877
1445
2878
Panel B
Period
# Div. Firms with DRIP
# Div. Firms without DRIP
# non-Div. Firms
Total
Pre-Crisis
356 (12%)
901 (30%)
1774 (58%)
3031
Crisis
487 (15%)
843 (26%)
1880 (59%)
3209
Panel A of Table I, indicates for each year of the sample period 2003-2012, the number of dividend paying firms
that offer a dividend reinvestment plan, the number of dividend paying firms without a DRIP and the number of
non-dividend paying companies. In panel B, the average number of DRIP firms, dividend paying non-DRIP
firms and non dividend paying firms are stated for the pre-crisis period (2003-2006) and the crisis period (20072009). The percentages are provided in parenthesis.
Table II
Summary Statistics of Firm Characteristics Variables
Mean
Median
Std. Dev.
N. Obs
Firm characteristic variables
1,Financial constraints
Whited Wu index
Kaplan Zingales index
0.5592
0.4549
0.6537
0.6150
0.7757
1.8999
29038
26812
2. Growth opportunities
Tobin’s Q (log)
0.4921
0.4026
0.5374
30922
3. Debt
Long term debt to total assets ratio
0.2507
0.0851
0.3667
30907
4. Dividend payout rate
Payout ratio
0.0230
0
0.5899
22065
5. Liquidity
Current ratio
3.7104
0.1987
13.5302
21250
6. Profitability
Return on assets ratio
Price earnings ratio
Net profit margin
-0.0012
0.3207
-0.0970
0.043
0.193
0.042
0.2668
0.5516
0.8133
30826
21621
29907
7. Volatility/ risk
beta
1.2205
1.12
1.8464
29262
8. Size
Total Assets
5439.52
516.98
22918.81
30922
9. Insider holdings
Insider ownership
0.1588
0.059
0.2073
28807
0.5350
0.58
0.3148
29657
0.3114
0
0.4631
30922
10. Institutional ownership
Institutional ownership
11. Financial crisis
crisis dummy
In Table II the summary statistics for the main firm characteristics variables are presented. The data on the firm
characteristics covers the period 2003-2012. Whited Wu index and Kaplan Zingales index refer to indices measuring
the financial constraints of a firm. Tobin’s Q (log) is the natural logarithm of Tobin’s Q. where Tobin’s Q is the
market value of total assets to the replacement value of assets. Leverage is measured by the long term debt to total
assets ratio. The payout ratio is the dividends per share to the earnings per share. Liquidity is measured by the
current ratio, which is defined as current assets over current liabilities. Beta is the indicator of the systematic risk of
the company. The return on assets ratio indicates the earnings of the company over its total assets. The Price
Earnings ratio is calculated the share price over the earnings per share. The net profit margin measures the earnings
of the firm divided by its sales. Total assets is used as the proxy for firm size, it is expressed in millions of dollars.
Insider ownership indicates the percentage of common stock owned by the company’s officers, directors and
beneficial owners with a stake larger than five percent. The percentage of Institutional ownership measures total
shares of institutional investors to total shares outstanding. Crisis dummy is equal to 1 for the years 2007. 2008 and
2009 and zero otherwise.
Table III
Variable
DRIP firms
Standard
Confidence level
Error
Lower
Upper
N
Mean
Whited Wu index
362
0.5901
0.0243
0.5423
Kaplan Zingales index
360
0.7274
0.0552
Tobin’s Q (log)
365
0.4559
Long term debt to total assets ratio
364
Payout ratio
Non-DRIP firms
Standard
Confidence level
Error
Lower
Upper
N
Mean
Mean dif.
0.6378
2444
0.5730
0.0159
0.5417
0.6042
0.0171
0.40
0.6188
0.8360
2595
0.4875
0.0303
0.4281
0.5469
0.2399
2.86***
0.0205
0.4156
0.4962
2800
0.6437
0.0099
0.6243
0.6631
-0.1878
-6.62***
0.3392
0.0178
0.3042
0.3741
2800
0.1778
0.0056
0.1668
0.1888
0.1613
9.58***
344
0.4538
0.0387
0.3776
0.5300
2658
0.1165
0.0096
0.0977
0.1352
0.3373
11.25***
Current ratio
326
2.3745
0.5716
1.2501
3.4989
1826
4.0103
0.3260
3.3710
4.6496
-1.6358
-2.02**
Return on assets ratio
365
0.0639
0.0029
0.0581
0.0697
2789
-0.0060
0.0060
-0.0178
0.0058
0.0699
4.19***
Price earnings ratio
342
0.2397
0.0158
0.2087
0.2708
1940
0.3637
0.0123
0.3395
0.3879
-0.1240
-4.12***
Net profit margin
365
0.0671
0.0044
0.0585
0.0758
2695
-0.1251
0.0177
-0.1598
-0.0905
0.1923
4.01***
Beta
365
0.7898
0.0310
0.7288
0.8509
2800
1.1427
0.0207
1.1021
1.1833
-0.3528
-6.04***
Total Assets
365
17052.45
2654.86
11831.66
22273.24
2800
2971.39
269.10
2443.73
3499.05
14081.06
11.60***
Insider ownership
365
0.0773
0.0069
0.0637
0.0909
2800
0.2201
0.0043
0.2116
0.2285
-0.1428
-11.70***
Institutional ownership
363
0.6693
0.0110
0.6477
0.6910
2772
0.4860
0.0061
0.4741
0.4979
0.1833
10.66***
t-test (sig)
In Table III the results of the univariate analysis are presented for the pre-crisis year 2005. The mean differences between firms with DRIPs and firms without DRIPS are provided for each firm characteristic. Moreover, the tstatistics are stated and the asterisks denote the significance of the mean differences *, **, and *** respectively indicate significance at the 1 percent, 5 percent, and 10 percent level. The sample period is 2003-2012. Whited Wu index
and Kaplan Zingales index refer to indices measuring the financial constraints of a firm. Tobin’s Q (log) is the natural logarithm of Tobin’s Q, where Tobin’s Q is the market value of total assets to the replacement value of assets.
Leverage is measured by the long term debt to total assets ratio. The payout ratio is the dividends per share to the earnings per share. Liquidity is measured by the current ratio, defined as current assets over current liabilities. Beta is the
indicator of the systematic risk of the company. The return on assets ratio indicates the earnings of the company over its total assets. The Price Earnings ratio is calculated the share price over the earnings per share. The net profit
margin measures the earnings of the firm divided by its sales. Total assets is used as the proxy for firm size, it is expressed in millions of dollars. Insider ownership indicates the percentage of common stock owned by the company’s
officers, directors and beneficial owners with a stake larger than five percent. The percentage of Institutional ownership measures total shares of institutional investors to total shares outstanding.
Table IV
Variable
Mean
Whited Wu index
555
0.6107
0.0269
0.5579
Kaplan Zingales index
549
0.5482
0.0554
Tobin’s Q (log)
556
0.2379
Long term debt to total assets ratio
556
Payout ratio
Non-DRIP firms
Standard
Confidence level
Error
Lower
Upper
N
Mean
0.6635
2568
0.5404
0.0170
0.5070
0.4393
0.6572
2545
0.5034
0.0420
0.4211
0.5857
0.0175
0.2036
0.2722
2671
0.2078
0.0103
0.1876
0.2281
0.0301
1.25
0.4593
0.0186
0.4228
0.4957
2669
0.3513
0.0092
0.3333
0.3693
0.1080
4.95***
493
0.3966
0.0215
0.3542
0.4389
2515
0.1175
0.0079
0.1021
0.1329
0.2790
13.83***
Current ratio
486
1.5320
0.3740
0.7971
2.2670
1766
4.0610
0.3351
3.4037
4.7182
-2.5290
-3.78***
Return on assets ratio
555
0.0625
0.0037
0.0552
0.0698
2665
-0.0310
0.0054
-0.0415
-0.0204
0.0935
7.86***
Price earnings ratio
493
0.1516
0.0102
0.1315
0.1717
1752
0.1973
0.0095
0.1787
0.2158
-0.0457
-2.45**
Net profit margin
556
0.0907
0.0168
0.0577
0.1237
2557
-0.1252
0.0186
-0.1617
-0.0887
0.2159
5.31***
Beta
542
1.1481
0.0257
1.0975
1.1986
2263
1.4281
0.0145
1.3997
1.4565
-0.2801
-8.71***
Total Assets
556
19293.87
2085.39
15197.64
23390.10
2671.00
2401.68
209.34
1991.19
2812.17
16892.19
15.99***
Insider ownership
553
0.1177
0.0083
0.1014
0.1339
2668
0.1913
0.0041
0.1832
0.1993
-0.0736
-7.51***
Institutional ownership
546
0.6041
0.0130
0.5786
0.6295
2619
0.5575
0.0061
0.5456
0.5694
0.0466
3.21***
DRIP firms
Standard
Confidence level
Error
Lower
Upper
N
0.5738
Mean dif.
t-test (sig)
0.0703
0.0448
1.82**
0.48
In Table IV the results of the univariate analysis are presented for the crisis year 2008. The mean differences between firms with DRIPs and firms without DRIPS are provided for each firm characteristic. Moreover, the tstatistics are stated and the asterisks denote the significance of the mean differences *, **, and *** respectively indicate significance at the 1 percent, 5 percent, and 10 percent level. The sample period is 2003-2012. Whited Wu
index and Kaplan Zingales index refer to indices measuring the financial constraints of a firm. Tobin’s Q (log) is the natural logarithm of Tobin’s Q, where Tobin’s Q is the market value of total assets to the replacement value of
assets. Leverage is measured by the long term debt to total assets ratio. The payout ratio is the dividends per share to the earnings per share. Liquidity is measured by the current ratio, defined as current assets over current liabilities.
Beta is the indicator of the systematic risk of the company. The return on assets ratio indicates the earnings of the company over its total assets. The Price Earnings ratio is calculated the share price over the earnings per share. The
net profit margin measures the earnings of the firm divided by its sales. Total assets is used as the proxy for firm size, it is expressed in millions of dollars. Insider ownership indicates the percentage of common stock owned by the
company’s officers, directors and beneficial owners with a stake larger than five percent. The percentage of Institutional ownership measures total shares of institutional investors to total shares outstanding.
Table V
Panel A: Summary statistics
362
Div. Firms with DRIP
Standard
Confidence level
Error
Lower
Upper
0.5901
0.0243
0.5423
0.6378
N
Mean
775
Div. Firms without DRIP
Standard
Confidence level
Error
Lower
Upper
0.5746
0.0228
0.5299
0.6193
1669
0.5722
Kaplan Zingales index
360
0.7274
0.0552
0.6188
0.8360
893
-0.0792
0.0693
-0.2152
0.0568
1702
0.7848
0.0257
0.7344
0.8352
Tobin’s Q (log)
365
0.4559
0.0205
0.4156
0.4962
961
0.5743
0.0153
0.5441
0.6044
1839
0.6799
0.0127
0.6551
0.7048
Long term debt to total assets ratio
364
0.3392
0.0178
0.3042
0.3741
961
0.2298
0.0104
0.2095
0.2501
1839
0.1507
0.0065
0.1379
0.1635
Payout ratio
344
0.4538
0.0387
0.3776
0.5300
819
0.3780
0.0290
0.3211
0.4349
1839
0
0
0
0
Current ratio
326
2.3745
0.5716
1.2501
3.4989
699
3.5018
0.5157
2.4892
4.5143
1127
4.3257
0.4202
3.5013
5.1501
Return on assets ratio
365
0.0639
0.0029
0.0581
0.0697
953
0.0454
0.0089
0.0279
0.0628
1836
-0.0327
0.0078
-0.0481
-0.0173
Price earnings ratio
342
0.2397
0.0158
0.2087
0.2708
799
0.2850
0.0164
0.2528
0.3171
1141
0.4188
0.0173
0.3848
0.4529
Net profit margin
365
0.0671
0.0044
0.0585
0.0758
950
-0.0084
0.0237
-0.0549
0.0381
1745
-0.1887
0.0239
-0.2356
-0.1419
Beta
365
0.7898
0.0310
0.7288
0.8509
961
0.8254
0.0253
0.7757
0.8750
1839
1.3085
0.0278
1.2539
1.3631
Total Assets
365
17052.45
2654.86
11831.66
22273.24
961
6671.46
742.99
5213.39
8129.53
1839
1037.85
106.34
829.30
1246.41
Insider ownership
365
0.0773
0.0069
0.0637
0.0909
961
0.2402
0.0078
0.2249
0.2554
1839
0.2096
0.0051
0.1995
0.2197
Institutional ownership
363
0.6693
0.0110
0.6477
0.6910
952
0.4662
0.0103
0.4459
0.4865
1820
0.4964
0.0074
0.4818
0.5110
Variable
Whited Wu index
N
Mean
N
Mean
Non Div. Firms
Standard
Confidence level
Error
Lower
Upper
0.0208
0.5314
0.6130
Panel B: Mean differences
Div. Firms with DRIPs -
t-test (sig.)
Div. Firms with DRIPs -
t-test (sig.)
Div. Firms without DRIPs -
t-test (sig.)
Div. Firms without DRIPs
0.0155
0.41
Non Div. Firms
0.0179
0.38
Non Div. Firms
0.0024
0.07
Kaplan Zingales index
0.8066
7.03***
-0.0574
-0.93
-0.8640
-14.06***
Tobin’s Q (log)
-0.1183
-4.24***
-0.2240
-7.51***
-0.1057
-5.10***
Long term debt to total assets ratio
0.1094
5.45***
0.1885
11.31***
0.0791
6.74***
Payout ratio
0.0758
1.48
0.4538
27.11***
0.3780
19.53***
Current ratio
-1.1272
-1.33
-1.9512
-2.32**
-0.8239
-1.23
Variable
Whited Wu index
Return on assets ratio
0.0185
1.28
0.0966
5.48***
0.0781
6.19***
Price earnings ratio
-0.0452
-1.67*
-0.1791
-5.45***
-0.1339
-5.39***
Net profit margin
0.0755
1.97**
0.2559
4.90***
0.1803
4.90***
beta
-0.0356
-0.78
-0.5186
-8.10***
-0.4831
-11.33***
10380.99
5.11***
16014.60
13.28***
5633.60
10.12***
Insider ownership
-0.1629
-12.21***
-0.1323
-11.08***
0.0306
3.37***
Institutional ownership
0.2032
11.23***
0.1729
9.94***
-0.0302
-2.37**
Total Assets
In Table V the results of the univariate analysis are presented for the pre-crisis year 2005 for three subsamples; DRIP firms, dividend-paying firms without a DRIP and non-dividend paying firms. In Panel A, the summary statistics for the main
firm characteristics are provided. In Panel B, the mean differences and their t-statistics and significance are stated *, ** and *** respectively indicate a significance of 1%, 5% and 10%. Whited Wu index and Kaplan Zingales index measure the
financial constraints of a firm. Tobin’s Q (log) is the natural logarithm of the market value of total assets to the replacement value of assets. Debt is measured by the long term debt to total assets ratio. The payout ratio is the dividends per share to the
earnings per share. The current ratio is defined as current assets over current liabilities and is used as a proxy for liquidity. The return on assets ratio indicates the earnings of the company over its total assets. Price Earnings ratio is the share price over the
earnings per share. Net profit margin measures the earnings of the firm divided by its sales. Beta measures the systematic risk of the company. Total assets is a proxy for firm size and is expressed in millions of dollars. Insider ownership and Institutional
ownership are respectively the percentage of common stock owned by company insiders and by institutions.
Table VI
Panel A: Summary statistics
555
Div. Firms with DRIP
Standard
Confidence level
Error
Lower
Upper
0.6107
0.0269
0.5579
0.6635
782
Div. Firms without DRIP
Mean
Standard
Confidence level
Error
Lower
Upper
0.5029
0.0280
0.4480
0.5578
1786
Non Div. Firms
Standard
Confidence level
Error
Lower
Upper
0.5568
0.0212
0.5152
0.5983
Kaplan Zingales index
549
0.5482
0.0554
0.4393
0.6572
768
-0.3563
0.1137
-0.5794
-0.1331
1777
0.8749
0.0308
0.8145
0.9353
Tobin’s Q (log)
556
0.2379
0.0175
0.2036
0.2722
797
0.1937
0.0165
0.1612
0.2261
1874
0.2139
0.0130
0.1885
0.2393
Long term debt to total assets ratio
556
0.4593
0.0186
0.4228
0.4957
797
0.4593
0.0179
0.4242
0.4944
1872
0.3053
0.0105
0.2848
0.3258
Payout ratio
493
0.3966
0.0215
0.3542
0.4389
641
0.4611
0.0266
0.4089
0.5133
1874
0
0
0
0
Current ratio
486
1.5320
0.3740
0.7971
2.2670
550
4.3114
0.6798
2.9761
5.6468
1216
3.9477
0.3774
3.2073
4.6882
Return on assets ratio
555
0.0625
0.0037
0.0552
0.0698
791
0.0448
0.0068
0.0315
0.0582
1874
-0.0630
0.0069
-0.0766
-0.0493
Price earnings ratio
493
0.1516
0.0102
0.1315
0.1717
649
0.1418
0.0087
0.1247
0.1589
1103
0.2299
0.0140
0.2023
0.2574
Net profit margin
556
0.0907
0.0168
0.0577
0.1237
791
0.0362
0.0227
-0.0083
0.0807
1766
-0.1974
0.0248
-0.2460
-0.1489
Beta
542
1.1481
0.0257
1.0975
1.1986
690
1.2987
0.0240
1.2516
1.3457
1573
1.4849
0.0178
1.4500
1.5198
Total Assets
556
19293.87
2085.39
15197.64
23390.10
797
5252.99
663.6658
3950.24
6555.73
1874
1189.04
82.47
1027.30
1350.78
Insider ownership
553
0.1177
0.0083
0.1014
0.1339
794
0.2192
0.0082
0.2032
0.2353
1874
0.1794
0.0047
0.1702
0.1886
Institutional ownership
546
0.6041
0.0130
0.5786
0.6295
778
0.5564
0.0108
0.5352
0.5776
1841
0.5579
0.0073
0.5436
0.5723
Variable
Whited Wu index
N
Mean
N
N
Mean
Panel B: Mean differences
Div. Firms with DRIPs -
t-test (sig.)
Div. Firms with DRIPs -
t-test (sig.)
Div. Firms without DRIPs -
t-test (sig.)
Div. Firms without DRIPs
0.1078
2.68***
Non Div. Firms
0.0539
1.32
Non Div. Firms
-0.0539
-1.46
Kaplan Zingales index
0.9045
6.35***
-0.3267
-5.15***
-1.2312
-13.96***
Tobin’s Q (log)
0.0443
1.80*
0.0240
0.94
-0.0202
-0.89
Long term debt to total assets ratio
0.0000
0.00
0.1539
7.09***
0.1540
7.77***
Payout ratio
-0.0645
-1.81*
0.3966
35.91***
0.4611
29.66***
Current ratio
-2.7794
-3.46***
-2.4157
-3.76***
0.3637
0.50
Return on assets ratio
0.0177
2.03**
0.1255
9.71***
0.1078
9.32***
Price earnings ratio
0.0098
0.73
-0.0783
-3.54***
-0.0881
-4.52***
Net profit margin
0.0546
1.79*
0.2882
6.38***
0.2336
5.84***
beta
-0.1506
-4.26***
-0.3368
-9.95***
-0.1862
-5.97***
Variable
Whited Wu index
14040.89
7.33***
18104.83
15.81***
4063.94
9.01***
Insider ownership
-0.1015
-8.47***
-0.0617
-6.33***
0.0398
4.43***
Institutional ownership
0.0476
2.82***
0.0461
3.04***
-0.0015
-0.11
Total Assets
In Table VI the results of the univariate analysis are presented for the crisis year 2008 for three subsamples; DRIP firms, dividend-paying firms without a DRIP and non-dividend paying firms. In Panel A, the summary statistics for the main firm
characteristics are provided. In Panel B, the mean differences and their t-statistics and significance are stated *, ** and *** respectively indicate a significance of 1%, 5% and 10%. Whited Wu index and Kaplan Zingales index measure the financial
constraints of a firm. Tobin’s Q (log) is the natural logarithm of the market value of total assets to the replacement value of assets. Debt is measured by the long term debt to total assets ratio. The payout ratio is the dividends per share to the earnings per
share. The current ratio is defined as current assets over current liabilities and is used as a proxy for liquidity. The return on assets ratio indicates the earnings of the company over its total assets. Price Earnings ratio is the share price over the earnings per
share. Net profit margin measures the earnings of the firm divided by its sales. Beta measures the systematic risk of the company. Total assets is a proxy for firm size and is expressed in millions of dollars. Insider ownership and Institutional ownership are
respectively the percentage of common stock owned by company insiders and by institutions.
Table VII
DRIP vs. non-DRIP Firms
(1)
Variable
Whited Wu index
(2)
coefficient
t-statistic (sig)
0.0031
0.77
Kaplan Zingales index
Tobin’s Q (log)
-0.0209
Div. Firms with DRIPs VS. Div. Firms without DRIPs
coefficient
(3)
t-statistic (sig)
0.0023
0.85
-1.76*
-0.0413
-3.08***
(4)
coefficient
t-statistic (sig)
0.0058
0.77
-0.0743
-2.85***
coefficient
t-statistic (sig)
0.0028
0.68
-0.1209
-4.11***
Long term debt to total assets ratio
0.0147
0.97
0.0340
1.83*
0.0232
0.89
0.0382
1.20
Payout ratio
-0.0025
-0.62
0.0020
0.47
-0.0052
-1.22
-0.0023
-0.47
Current ratio
0.0000
0.27
0.0000
0.08
0.0000
0.11
0.0000
0.01
Return on assets ratio
0.1269
3.03***
0.0504
1.04
0.2973
2.78***
0.1271
1.09
Price earnings ratio
0.0029
0.70
0.0046
0.92
0.0128
1.51
0.0146
1.38
Net profit margin
0.0083
1.58
0.0072
1.68*
0.0165
0.99
0.0059
0.48
beta
0.0104
1.81*
0.0060
0.93
0.0391
2.63***
0.0214
1.39
Total Assets
0.0000
4.43***
0.0000
4.14***
0.0000
3.81***
0.0000
3.63***
Insider ownership
-0.0444
-2.50**
-0.0743
-3.28***
-0.0891
-2.54**
-0.1402
-3.22***
Institutional ownership
0.0154
0.76
-0.0074
-0.30
0.0709
1.69*
0.0358
0.73
Crisis dummy
0.0204
3.98***
0.0342
5.91***
0.0208
2.31**
0.0427
4.91***
Crisis dummy X Whited Wu
0.0089
1.39
0.0214
1.92*
Concept
0.1877
10.30***
0.3206
8.85***
N
12490
11481
6923
6567
R-squared
0.8891
0.8792
0.8770
0.8652
Crisis dummy X Kaplan Zingales
-0.0113
-2.65***
0.2156
10.53***
-0.0099
-1.49
0.3752
9.49***
In Table VII the results of the multivariate analysis are presented when comparing DRIP offering firms with non- DRIP firms, and when comparing DRIP firms with dividend paying businesses without DRIPs. The Linear probability
regressions show the relationship between the likelihood that a firm offers a DRIP and the proxies for the various firm characteristics. The regressions included firm fixed effects and clustered standard errors. The coefficients indicate
how a one unit change in any of the firm characteristic variables affects the likelihood that a firm offers a DRIP. *, ** and *** respectively indicate a significance of 1%, 5% and 10%. The sample period is 2003-2012. Whited Wu
index and Kaplan Zingales index measure the financial constraints of a firm. Tobin’s Q (log) is the natural logarithm of the market value of total assets to the replacement value of assets. Debt is measured by the long term debt to
total assets ratio. The payout ratio is the dividends per share to the earnings per share. The current ratio is defined as current assets over current liabilities and is used as a proxy for liquidity. The return on assets ratio indicates the
earnings of the company over its total assets. Price Earnings ratio is the share price over the earnings per share. Net profit margin measures the earnings of the firm divided by its sales. Beta measures the systematic risk of the
company. Total assets is a proxy for firm size and is expressed in millions of dollars. Insider ownership and institutional ownership are respectively the percentage of common stock owned by company insiders and by institutions.
Crisis dummy is equal to 1 for the years 2007. 2008 and 2009 and zero otherwise. The interaction terms, Crisis dummy X Whited Wu and Crisis dummy X Kaplan Zingales, measure the impact of financially constrained firms during
the financial crisis.
Table VIII
Linear Probability regressions
Tobin's Q
(log)
Leverage
Payout
ratio
C Ratio
ROA
PE
NPM
Beta
0,0666
-0,0459
-0,0001
0,0007
-0,1184
-0,0044
0,1077
0,0015
0,0957
-0,0454
-0,0069
0,0007
-0,3165
-0,0042
0,1477
0,2928
-0,0308
-0,0152
-0,0003
-0,7152
0,0248
-0,0560
0,2825
-0,0767
-0,0071
0,0002
-0,4512
0,0443
-0,1035
-0,0921
-0,0092
0,0007
0,6426
-0,0206
0,0700
0,0008
-0,0004
-0,3993
0,1953
0,0051
0,0006
-0,4134
0,2215
0,0015
-0,4594
0,1454
-0,0246
-0,4321
WW
KZ
0.05
WW
KZ
Total
assets
Insider
Ownership
Institutional
Ownership
Crisis
dummy
0,0000
0,0120
-0,0092
-0,0821
-0,0086
0,0000
0,0963
-0,0524
-0,0791
-0,0850
0,0000
0,3826
-0,0829
-0,0177
0,1127
-0,0561
0,0000
0,2690
0,0616
0,0123
-0,0141
0,4140
0,1421
0,0000
-0,4178
0,4632
0,1386
0,0488
0,0079
-0,0858
-0,0023
0,0000
-0,0937
0,0744
0,0537
0,3011
0,0105
0,0863
-0,0763
0,0000
-0,1751
-0,0100
-0,1560
0,0010
0,3229
0,0319
-0,0863
-0,0880
0,0000
-0,1131
0,0377
-0,1349
0,0269
-0,0016
1,0259
0,0118
-0,3200
0,1383
0,0000
-0,3668
0,4460
0,0718
0,2370
0,0366
-0,0027
0,9638
0,0113
-0,5795
0,1035
0,0000
-0,3223
0,3327
0,0775
Tobin's Q
(log)
Leverage
Payout
ratio
C Ratio
ROA
Insider
Ownership
Institutional
Ownership
1.95*
-1.06
-0.02
1.03
-0.72
-0.52
0.92
0.12
-1.03
0.27
-0.16
-5.16***
2.19**
-0.83
-0.70
0.94
-1.75*
-0.38
1.24
-0.53
-1.39
1.38
-0.74
-4.70***
4.12***
-0.47
-0.61
-0.36
-2.09***
0.82
-0.31
-2.61***
-1.28
3.20***
-0.66
-0.92
3.82***
-1.08
-0.25
0.17
-1.31
1.79*
0.60
-1.69*
-0.99
2.43**
0.46
0.63
-1.81*
-1.27
-0.50
0.53
2.12***
-0.70
1.98**
5.16***
5.18***
-3.87***
3.45***
6.78***
-0.41
1.32
0.06
-0.37
0.22
0.44
-0.58
-0.11
-0.09
-1.29
0.98
4.10***
-6.60***
2.91***
0.47
0.54
0.96
0.55
0.45
-2.65***
-0.90
-1.91*
-0.12
-7.89***
-6.07***
2.73***
0.14
1.02
0.99
2.49**
-0.41
-2.74***
-0.85
-1.27
0.42
-7.70***
-5.79***
1.83*
1.42
-1.94*
2.80***
0.37
-1.53
3.71***
1.02
-2.20**
2.53***
3.20***
-5.20***
2.57**
1.79*
-3.24***
2.57***
0.46
-2.28**
2.68***
0.81
-1.97**
1.88*
3.88***
Crisis Dum.
x WW
Crisis Dum.
Constant
x KZ
0,0234
0,1130
DRIP
feature
Discount
-0,0129
Partial reinvestment option
0,0315
0,0006
0,0187
Cash option
0,0696
Direct option
-0,0296
0,0181
-0,0039
Service charge
-0,0283
0,0029
0,0040
0,1604
0,7791
-0,0128
-0,0238
0,6172
0,2730
-0,0057
0,0370
0,8187
0,7054
-0,0072
0,0460
0,6824
0,2566
-0,0026
0,3786
t-statistics
PE
NPM
Beta
Total
assets
Crisis
dummy
Crisis Dum.
x WW
Crisis Dum.
x KZ
Constant
DRIP feature
Discount
Partial reinvestment option
-0.71
1.32
1.20
Cash option
2.63***
1.26
Direct option
-1.27
-0.23
Service charge
-1.06
-1.18
1.25
0.22
0.17
2.01**
2.38**
7.20***
-0.79
-0.84
5.35***
2.45**
-0.61
1.29
11.32***
9.44***
-0.46
1.42
7.96***
1.91*
-0.15
2.75***
Linear probability regressions are applied for five different DRIP features in order to investigate how the usage of these features differs among different types of DRIP offering companies. The regressions included firm fixed effects and clustered standard errors. The results
are presented in Table VIII. The DRIP feature is in each regression the dependent variable which indicates 1 if the company offers the feature and 0 if it does not. Discount indicates whether the investors are offered a discount when reinvesting dividends through the DRIP.
With the Partial reinvestment option firms offer investors the option to have part of their dividends paid out in cash while reinvesting the other part in shares. The Cash option dummy refers to the DRIP option where DRIP participants are able to invest additional amounts
to purchase extra shares. Direct option indicates that the also non-DRIP participants can buy shares directly from the firms instead of having to go through a broker. Service fee refers to the fee charged by some companies to investors for the participation in the plan. The
coefficients in the linear probability regressions indicate how a one unit change in a particular firm characteristic affects the likelihood that a DRIP firm offers a specific DRIP feature. *, ** and *** respectively indicate a significance of 1%, 5% and 10%. The sample
period is 2003-2012. WW refers to the Whited Wu financial constraints index and KZ to the Kaplan Zingales index. Tobin’s Q (log) is the natural logarithm of the market value of total assets to the replacement value of assets. Leverage is measured by the long term debt to
total assets ratio. The payout ratio is the dividends per share to the earnings per share. The C Ratio is defined as current assets over current liabilities and is used as a proxy for liquidity. ROA indicates the earnings of the company over its total assets. PE ratio is the share
price over the earnings per share. NPM measures the net profit margin, which is earnings of the firm divided by its sales. Beta measures the systematic risk of the company. Total assets is a proxy for firm size and is expressed in millions of dollars. Insider ownership and
institutional ownership are respectively the percentage of common stock owned by company insiders and by institutions. Crisis dummy is equal to 1 for the years 2007. 2008 and 2009 and zero otherwise. The interaction terms, Crisis dummy X Whited Wu and Crisis dummy
X Kaplan Zingales, measure the impact of financially constrained firms during the financial crisis.