Homemade equity offerings via dividend reinvestment and stock purchase plans

Abstract

This paper investigates equity issuances through dividend reinvestment and stock purchase plans (DRSPPs). Using a unique sample collected from security registration filings, we show that firms can issue new shares through DRSPPs without using underwriters and consequently, save a large part of direct costs. This economical form of equity offering helps high dividend paying firms retain a substantial amount of cash flow from operations. With this innovative strategic practice of capital‐raising, we provide direct evidence showing that the pecking order still drives firms' financing. Furthermore, equity offerings via DRSPPs can avoid negative stock market reactions around the issuance date.