Equity Financing, Equity Lending, and Price Pressure: The Case of DRIP Arbitrage
64 Pages Posted: 6 Apr 2020 Last revised: 10 Mar 2021
Date Written: November 15, 2019
Dividend reinvestment plans (DRIPs) with discount offer shareholders the choice between receiving cash dividends or additional shares at a discount. We provide evidence on DRIP arbitrage where DRIP arbitrageurs extract the DRIP discount through short-term equity borrowing. We show the relation between equity lending, equity financing, and stock returns through DRIP arbitrage. DRIP arbitrage increases search costs in the equity lending market and creates negative price pressure in the stock market around dividend dates. Restrictions on equity lending impede DRIP arbitrage and negatively affect equity financing. Our results are more pronounced when the demand for DRIP arbitrage is higher.
Keywords: Equity lending; Short selling; Equity Financing; Price pressure; Dividend reinvestment plan
JEL Classification: G12; G14; G35
Suggested Citation: Suggested Citation