Underwritten Dividend Reinvestment Plans and Conflicts of Interest

Forthcoming: Journal Of Business Finance and Accounting, Issue 43 9-10

Posted: 11 Oct 2016

See all articles by Sean Foley

Sean Foley

University of Sydney Business School

Graham Partington

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

Nicholas Pricha

Independent

Jiri Svec

The University of Sydney - Discipline of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 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

Foley, Sean and Partington, Graham and Pricha, Nicholas and Svec, Jiri, Underwritten Dividend Reinvestment Plans and Conflicts of Interest (October 10, 2016). Forthcoming: Journal Of Business Finance and Accounting, Issue 43 9-10 . Available at SSRN: https://ssrn.com/abstract=2850779

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Graham Partington (Contact Author)

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

Nicholas Pricha

Independent ( email )

No Address Available

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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