Preferred Stock: Some Insights into Capital Structure

40 Pages Posted: 25 Mar 2008 Last revised: 5 May 2008

See all articles by Jarl G. Kallberg

Jarl G. Kallberg

New York University (NYU) - Department of Finance

Crocker H. Liu

Arizona State University

Sriram V. Villupuram

University of Texas at Arlington - Department of Finance and Real Estate

Date Written: March 18, 2008

Abstract

Capital structure theory and empirical analysis has focused almost exclusively on the choice between debt and equity. Preferred stock has received relatively little attention, in contrast, even though this market, in the U.S., represented $868 billion in new capital during the period 1999 to 2005. This empirical study focuses on the reactions of equity holders through an event study analysis and of debt holders through a default spread analysis to the announcement of 427 preferred issues. We find that the equity abnormal announcement returns are positive for straight preferred stock announcements, when they are combined with convertible preferred announcements, the equity abnormal returns are -0.65%, which is much closer to zero than to the magnitude of SEO announcements; furthermore, these returns are higher for firms with greater earnings potential and lower financial distress risk. We also find that credit default swap spreads decrease upon announcement of a preferred issue. These results are consistent with the hypothesis that equity holders interpret the preferred issue, on average, as debt, since the magnitude of the usual negative reaction to seasoned equity issuance is not found and bondholders interpret the preferred issue as equity, since the issuance does not increase the firm's default risk.

Keywords: Preferred Stock, Capital Structure

JEL Classification: G32, L14

Suggested Citation

Kallberg, Jarl G. (Jerry) and Liu, Crocker H. and Villupuram, Sriram V., Preferred Stock: Some Insights into Capital Structure (March 18, 2008). Available at SSRN: https://ssrn.com/abstract=1108673 or http://dx.doi.org/10.2139/ssrn.1108673

Jarl G. (Jerry) Kallberg

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0339 (Phone)
212-995-4233 (Fax)

Crocker H. Liu

Arizona State University ( email )

W.P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-3259 (Phone)
480-965-8539 (Fax)

HOME PAGE: http://www.public.asu.edu/~chliu1

Sriram V. Villupuram (Contact Author)

University of Texas at Arlington - Department of Finance and Real Estate ( email )

Box 19449 UTA
Arlington, TX 76019
United States

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