Why Firms Offer New-Issue Direct Stock Purchase Plans

Journal of Applied Finance, Fall/Winter 2012, Volume 22, No.2

Posted: 7 Sep 2012

See all articles by Tarun K. Mukherjee

Tarun K. Mukherjee

University of New Orleans

He Wei Bin

affiliation not provided to SSRN

H. Kent Baker

American University - Kogod School of Business

Multiple version iconThere are 3 versions of this paper

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)

Suggested Citation

Mukherjee, Tarun K. and Bin, He Wei and Baker, H. Kent, Why Firms Offer New-Issue Direct Stock Purchase Plans (2012). Journal of Applied Finance, Fall/Winter 2012, Volume 22, No.2, Available at SSRN: https://ssrn.com/abstract=2142956

Tarun K. Mukherjee (Contact Author)

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

He Wei Bin

affiliation not provided to SSRN ( email )

H. Kent Baker

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202-885-1949 (Phone)
202-885-1992 (Fax)

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