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A discrete choice model of dividend reinvestment plans: classification and prediction

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  • Thomas P. Boehm
  • Ramon P. DeGennaro

Abstract

We study 852 companies with dividend reinvestment plans in 1999 matched by total assets to 852 companies without such plans. We use discrete choice methods to predict the classification of these companies. We interpret the misclassified companies as being likely to switch their plan status. That is, if a firm's financial data suggest that a company should have had a dividend reinvestment plan in 1999 but did not, then we expect that it would be more likely to institute a plan than the other companies in the sample. Conversely, if it did have a plan but the financial data suggest that it should not, then we expect that the company would be more likely to drop the plan. We use data from 2004 to explore this conjecture and find evidence supporting it. Our model is an economically and statistically reliable predictor of changes in plan status. We also identify which variables have the most influence on a company's decision whether or not to offer a plan.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2007-22.

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Date of creation: 2007
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Handle: RePEc:fip:fedawp:2007-22

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  1. Scholes, Myron S. & Wolfson, Mark A., 1989. "Decentralized investment banking : The case of discount dividend-reinvestment and stock-purchase plans," Journal of Financial Economics, Elsevier, vol. 24(1), pages 7-35, September.
  2. Shaffer, Sherrill, 1991. "Aggregate deposit insurance funding and taxpayer bailouts," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 1019-1037, September.
  3. Todd, Janet M. & Domian, Dale L., 1997. "Participation rates of dividend reinvestment plans: Differences between utility and nonutility firms," Review of Financial Economics, Elsevier, vol. 6(2), pages 121-135.
  4. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
  5. Peterson, Pamela P & Peterson, David R & Moore, Norman H, 1987. "The Adoption of New-Issue Dividend Reinvestment Plans and Shareholder Wealth," The Financial Review, Eastern Finance Association, vol. 22(2), pages 221-32, May.
  6. Dammon, Robert M & Spatt, Chester S, 1992. " An Option-Theoretic Approach to the Valuation of Dividend Reinvestment and Voluntary Purchase Plans," Journal of Finance, American Finance Association, vol. 47(1), pages 331-47, March.
  7. Calhoun, Charles A & Deng, Yongheng, 2002. "A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 9-33, Jan.-Marc.
  8. Ryngaert, Michael, 1988. "The effect of poison pill securities on shareholder wealth," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 377-417, January.
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