Australian dividend reinvestment plans: An event study on discount rates

Keith K.W. Chan, Damien W. McColough, Michael T. Skully

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)

Abstract

The announcement effects are examined on shareholder returns of Australian companies introducing dividend reinvestment plans (DRPs) with a range of price discounts on the reinvestments. Finnerty argues that the price discount results in a transfer of wealth from non-participants to participants and the greater the discount, the greater is the amount of wealth transferred (Finnerty, J. D. 1989. New issue dividend reinvestment plans and the cost of equity capital, Journal of Business Research, 18, 127-39). The wealth transfer argument predicts the announcement effect to be zero or negative, but Hansen et al. suggest that this discount should be viewed as a flotation cost, and if the discount is established in accordance with value maximization principles, the impact should be either positive or zero (Hansen, R. S., Pinkerton, J. M. and Keown, A. J. 1985. On dividend reinvestment plans: the adoption decision and stockholder wealth effects, Review of Business and Economic Research, 20, 1-10). The results indicate that Australian shareholders responded positively to the introduction of DRPs offering a 7.5% discount, but indifferently to DRPs with a discount of 5% or 10%. These results appear to support the predictions of the flotation cost hypothesis.

Original languageEnglish
Pages (from-to)551-561
Number of pages11
JournalApplied Financial Economics
Volume6
Issue number6
DOIs
Publication statusPublished - 1 Jan 1996

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