The Offer Yield of Preferred Stocks

24 Pages Posted: 4 Mar 2002

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: February 2002

Abstract

Despite the growing popularity of preferred stocks, no previous study has empirically examined their offer yields relative to comparable bonds. Like debt preferred stocks also offer a constant yield to investors. But preferred stocks have longer durations than bonds and are also subordinate to bonds. Hence, preferred stocks are generally riskier than bonds. This "risk effect" is likely to increase preferred stocks' offer yield relative to bonds. However, preferred stock dividends are often tax-deductible to the corporate investor. This tax benefit offsets the risk effect. We empirically examine the net impact on the yield differential between preferred stocks and bonds by considering "matched pairs" of these securities issued between January, 1982 and September 2000. We find that the risk effect dominates the tax effect for financial firms and risky issuers while the tax effect dominates for utilities and highly rated issues.

Suggested Citation

Bajaj, Mukesh and Mazumdar, Sumon C. and Sarin, Atulya, The Offer Yield of Preferred Stocks (February 2002). Available at SSRN: https://ssrn.com/abstract=267370 or http://dx.doi.org/10.2139/ssrn.267370

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 (Contact Author)

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

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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