An Option-Theoretic Approach to the Valuation of Dividend Reinvestment and Voluntary Purchase Plans




    Search for more papers by this author
    • Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 15213. We gratefully acknowledge the valuable comments of Peter Bossaerts, Steve Heston, Duane Seppi, Renϩ Stulz (the editor), and the seminar participants at Dartmouth College, the Massachusetts Institute of Technology, New York University, and Princeton University. We wish to thank Bernt Oedegaard for his computational and programming assistance and the National Science Foundation and the American Association of Individual Investors' Award at the 1990 Western Finance Association meetings for their financial support.


Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly-issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.