Elective Stock and Scrip Dividends

We investigate firms’ decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and s...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Feito Ruiz, Isabel, Renneboog, Luc, Vansteenkiste, Cara
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2018
Subjects
Dividend reinvestment plans
Investments
United Kingdom > UK
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Summary:We investigate firms’ decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms’ cash-preservation motives.