Working Paper: NBER ID: w3093
Authors: 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.
Keywords: discount dividend reinvestment; stock purchase plans; investment banking; market efficiency
JEL Codes: G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Participation in discount stock purchase plans (G35) | Profit generation (D33) |
| Investment strategy (discount purchase and selling) (G11) | Profit generation (D33) |
| Increased participation in discount plans (L42) | Decrease in discounts (L42) |