Homemade equity offerings via dividend reinvestment and stock purchase plans

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 firms, especially those paying high dividends (i.e., Real Estate Investment Trusts), retain a substantial amount of cash flow from operations. The alternative source of capital is crucial for some financially constrained firms to maintain growth. The determinants of equity issuance via DRSPPs are different between REITs and industrial firms. Moreover, unlike seasoned equity offerings, equity offerings via DRSPPs can avoid negative stock market reactions around the issuance date. Overall, our findings expand upon an existing discovery of innovative strategic practices for equity financing and provide direct evidence showing that the Pecking Order still drives firms’ financing.