Cost of Issuing Preferred Stock: An Empirical Analysis

25 Pages Posted: 23 Jan 2001

See all articles by Mukesh Bajaj

Mukesh Bajaj

LECG, LLC; University of California, Berkeley - Haas School of Business

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC; University of California, Berkeley - Haas School of Business

Atulya Sarin

Santa Clara University - Department of Finance

Date Written: November 2000

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

Suggested Citation

Bajaj, Mukesh and Mazumdar, Sumon C. and Sarin, Atulya, Cost of Issuing Preferred Stock: An Empirical Analysis (November 2000). Available at SSRN: https://ssrn.com/abstract=251810 or http://dx.doi.org/10.2139/ssrn.251810

Mukesh Bajaj

LECG, LLC ( email )

2000 Powell Street, Suite 600
Emeryville, CA 94608
United States
510-450-6736 (Phone)

University of California, Berkeley - Haas School of Business

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC ( email )

2000 Powell Street, Suite 600
Emeryville, CA 94608
United States
510-450-5493 (Phone)

University of California, Berkeley - Haas School of Business

Finance Department
Berkeley, CA 94720
United States

Atulya Sarin (Contact Author)

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

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