Cost of Issuing Preferred Stock: An Empirical Analysis

Abstract

U.S. firms commonly use preferred stocks to raise external capital. Yet this hybrid security's issuance costs and offer yields have not been previously examined in a systematic manner. We analyze a sample of 3,042 preferred stock issues by publicly traded U.S. firms between 1980 and 1999. We find that convertible preferred stock, which are riskier than straight preferred stock, entail higher gross spreads and other direct expenses. Gross spreads and issuance cost are influenced by scale, credit rating and industry effects. We also compare yields on preferred stocks to that of various bellwether bond yields (such as the 30-year Treasury and AAA and BBB corporate bonds). Our results strongly supported the conventional tax-based argument that suggests that yields on preferred stocks should be lower than comparable risk corporate bonds.

Keywords: Preferred Stock, Cost of Issuing

JEL Classification: G10