Why Firms Offer New-Issue Direct Stock Purchase Plans
Journal of Applied Finance, Fall/Winter 2012, Volume 22, No.2
Posted: 7 Sep 2012
There are 3 versions of this paper
Why Firms Offer New-Issue Direct Stock Purchase Plans
Why Firms Offer New-Issue Direct Stock Purchase Plans
Why Firms Offer New-Issue Direct Stock Purchase Plans
Date Written: 2012
Abstract
We investigate why firms choose to issue new shares to fund their direct stock purchase plans (DSPPs). The evidence supports our hypothesis that such firms are high growth firms facing shortages of internal capital along with a high marginal cost of external capital. We also hypothesize that firms use new-issue DSPPs to raise equity in smaller installments before making full-scale seasoned equity offerings (SEOs). The majority of firms in our sample offer SEOs within five years after initiating new-issue DSPPs. The market appears to perceive new-issue DSPPs as small-scale SEOs given that the reaction to SEO announcements is significantly higher for these firms than for matching firms without DSPPs.
Keywords: Direct Stock Purchase Plans (DSPPs), seasoned equity offerings (SEOs), Dividend Reinvestment Plans (DRIPs)
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