Today many firms offer dividend reinvestment plans (DRIPs), which enable
stockholders to use dividends received on the firm’s stock to acquire additional
shares—even fractional shares—at little or no transaction cost. Some companies
even allow investors to make their initial purchases of the firm’s stock directly
from the company without going through a broker. With DRIPs, plan participants
typically can acquire shares at about 5 percent below the prevailing market
price. From its point of view, the firm can issue new shares to participants more
economically, avoiding the underpricing and flotation costs that would accompany
the public sale of new shares. Clearly, the existence of a DRIP may enhance
the market appeal of a firm’s shares