Price Pressure from Dividend Reinvestment Activity: Evidence from Closed-End Funds

We test the price pressure hypothesis using a novel setting: open-market purchases of shares in closed-end mutual funds by dividend reinvestment plans (DRIP). Abnormal volume, returns and intraday data around dividend payment dates provide evidence consistent with upward price pressure created as DRIP agents reinvest dividends in fund shares. Our results suggest that excess demand curves for closed-end fund shares are downward sloping and that DRIP agents could improve shareholder returns by changing the timing and/or size of their buy orders related to the DRIP's needs.