Equity Financing, Equity Lending, and Price Pressure: The Case of DRIP Arbitrage

64 Pages Posted: 6 Apr 2020 Last revised: 10 Mar 2021

See all articles by Tze Chuan 'Chewie' Ang

Tze Chuan 'Chewie' Ang

Deakin University - Department of Finance; Financial Research Network (FIRN)

Xin Chang

Nanyang Business School, Nanyang Technological University

Xiaoxiong Hu

Nanyang Technological University (NTU), Nanyang Business School, Division of Banking & Finance, Students

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: November 15, 2019

Abstract

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

Ang, Tze Chuan and Chang, Xin and Hu, Xiaoxiong and Verwijmeren, Patrick, Equity Financing, Equity Lending, and Price Pressure: The Case of DRIP Arbitrage (November 15, 2019). Nanyang Business School Research Paper No. 20-03, Available at SSRN: https://ssrn.com/abstract=3552416 or http://dx.doi.org/10.2139/ssrn.3552416

Tze Chuan Ang (Contact Author)

Deakin University - Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia
+61 3 9244 6626 (Phone)

HOME PAGE: http://www.deakin.edu.au/profiles/tze-ang

Financial Research Network (FIRN)

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

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

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

HOME PAGE: https://personal.ntu.edu.sg/changxin/

Xiaoxiong Hu

Nanyang Technological University (NTU), Nanyang Business School, Division of Banking & Finance, Students ( email )

S3-B1B-76 Nanyang Avenue
Singapore
Singapore

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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