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Decentralized Investment Banking: The Case of Discount Dividend-Reinve stment and Stock-Purchase Plans

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  • Myron S. Scholes
  • Mark A. Wolfson

Abstract

Discount dividend-reinvestment and stock-purchase plans allow shareholders to capture part of the underwriting fees incurred in new stock offerings and save sponsoring firms some of the usual underwriting costs. We tested the degree to which individual investors can profitably serve this investment banking function by implementing simple investment/trading strategies designed to capture the discounts and distribute the shares in the market. The large profits earned by our strategies raise serious questions about why it takes firms so long to raise the target level of capital and why many eligible shareholders do not participate in these discount plans.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3093.

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Date of creation: Sep 1989
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Publication status: published as Journal of Financial Economics, September 1989.
Handle: RePEc:nbr:nberwo:3093

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  1. Smith, Clifford Jr., 1986. "Investment banking and the capital acquisition process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 3-29.
  2. Gibbons, Michael R & Hess, Patrick, 1981. "Day of the Week Effects and Asset Returns," The Journal of Business, University of Chicago Press, vol. 54(4), pages 579-96, October.
  3. Barclay, Michael J. & Smith, Clifford Jr., 1988. "Corporate payout policy : Cash Dividends versus Open-Market Repurchases," Journal of Financial Economics, Elsevier, vol. 22(1), pages 61-82, October.
  4. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
  5. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  7. Smith, Clifford Jr., 1977. "Alternative methods for raising capital : Rights versus underwritten offerings," Journal of Financial Economics, Elsevier, vol. 5(3), pages 273-307, December.
  8. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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Cited by:
  1. Thomas P. Boehm & Ramon P. DeGennaro, 2011. "A discrete choice model of dividend reinvestment plans: classification and prediction," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 32(4), pages 215-229, June.
  2. Sophie Manigart & Koen De Waele, 1999. "Choice dividends and contemporaneous earnings announcements on a small stock market: an empirical study," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 161, pages 27-56.
  3. William C. Weld & Roni Michaely & Richard H. Thaler & Shlomo Benartzi, 2009. "The Nominal Share Price Puzzle," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 121-42, Spring.
  4. Ramon P. DeGennaro, 2003. "Direct investments in securities: A primer," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-14.
  5. M. Ameziane Lasfer, 1997. "On the Motivation for Paying Scrip Dividends," Financial Management, Financial Management Association, vol. 26(1), Spring.
  6. Chiang, Kevin & Frankfurter, George M. & Kosedag, Arman, 2005. "Exploratory analyses of dividend reinvestment plans and some comparisons," International Review of Financial Analysis, Elsevier, vol. 14(5), pages 570-586.
  7. Chan, Keith K. W. & McColough, Damien W. & Skully, Michael T., 1995. "Dividend reinvestment plans in australia," Global Finance Journal, Elsevier, vol. 6(1), pages 79-99.
  8. Gaia Barone, 2008. "Arbitrages and Arrow-Debreu Prices," Rivista di Politica Economica, SIPI Spa, vol. 98(6), pages 43-78, November-.

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