The Impact of Trust-Preferred Issuance on Bank Default Risk and Cash Flow: Evidence from the Debt and Equity Securities Markets

Posted: 19 Jul 2003

See all articles by Keith D. Harvey

Keith D. Harvey

Boise State University - College of Business and Economics

M. Cary Collins

The University of Tennessee

James W. Wansley

University of Tennessee

Abstract

Trust-preferred stock is a debt-equity hybrid that offers the tax deductibility of dividends but is treated as equity capital by bank regulators and rating agencies. The purpose of this paper is to examine whether holders of bank debt securities benefit from trust-preferred issuance in the form of lower default premia and whether bank shareholders benefit from the tax deductibility of trust-preferred dividends. Using daily returns surrounding the Federal Reserve's announcement that trust-preferred securities would be included as a component of commercial banks' Tier I equity capital, we find evidence to support both hypotheses.

JEL Classification: G21

Suggested Citation

Harvey, Keith D. and Collins, Mitchell Cary and Wansley, James W., The Impact of Trust-Preferred Issuance on Bank Default Risk and Cash Flow: Evidence from the Debt and Equity Securities Markets. Available at SSRN: https://ssrn.com/abstract=395886

Keith D. Harvey (Contact Author)

Boise State University - College of Business and Economics ( email )

1910 University Drive
Boise, ID 83725
United States

Mitchell Cary Collins

The University of Tennessee ( email )

428 Stokely Management Center
Knoxville, TN 37996
United States

James W. Wansley

University of Tennessee ( email )

428 Stokely Management Center
Knoxville, TN 37996
United States

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