Direct Stock Purchases and Abnormal Returns

Abstract

This study highlights many important features of the direct stock purchase plans of firms that are managed by three large bank administrators and the characteristics of firms that offer such plans. Many firms arrange for shares on behalf of their plan participants solely via market purchases, while others also make use of internally issued shares. Thus, the latter group of firms can use these plans to raise equity capital; it is shown that these firms are also more likely to engage in secondary equity offerings. Consistent with additional demand for stock due to direct stock purchases, plan-offering firms exhibit positive abnormal stock returns (and abnormally high trading volume) on the preannounced investment day(s) listed in their prospectuses.

JEL Classification: G10, G14