Underwritten Dividend Reinvestment Plans and Conflicts of Interest

24 Pages Posted: 10 Nov 2016

See all articles by Nicholas Pricha

Nicholas Pricha

Independent

Sean Foley

Macquarie University

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Jiri Svec

The University of Sydney - Discipline of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October/November 2016

Abstract

We examine conflicts of interests arising from the pricing of seasoned equity offerings (SEOs) in underwritten dividend reinvestment plans (DRIPs). A DRIP is a type of SEO that enables shareholders automatically to reinvest their dividend entitlements in the issuing company's shares. The underwriters have an incentive to sell stock during the DRIP pricing period in order to hedge price risk and/or to reduce the price at which shares are issued. Using individual brokers’ transactions, we show that underwriting brokers engage in an abnormally high level of selling during the issue pricing period. Comparison of pricing period returns between stocks with underwritten DRIPs and a matched sample of non‐underwritten DRIPs shows that significantly more negative returns accrue to firms that have their issues underwritten.

Keywords: conflicts of interest, dividend reinvestment plans, DRIP, underpricing, underwriter, rights issues, SEO

JEL Classification: G14

Suggested Citation

Pricha, Nicholas and Foley, Sean and Partington, Graham and Svec, Jiri, Underwritten Dividend Reinvestment Plans and Conflicts of Interest (October/November 2016). Journal of Business Finance & Accounting, Vol. 43, Issue 9-10, pp. 1361-1384, 2016, Available at SSRN: https://ssrn.com/abstract=2867190 or http://dx.doi.org/10.1111/jbfa.12226

Sean Foley

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia
0417702600 (Phone)

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jiri Svec

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9036 6241 (Phone)

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