Repurchases of convertible preferred stock and shareholder wealth

In this paper we provide the first comprehensive examination of the stock price reaction to announcements of convertible preferred stock repurchases over the 1981 to 2005 period. We document a positive and significant average common stock abnormal return of 3.27% around announcements of these repurchases. We test signaling and free cash flow explanations for the observed wealth effects by studying abnormal returns and changes in operating performance around repurchase announcements. We find that abnormal returns are positively related to size of repurchases and managerial ownership. We find no evidence of higher stock price reactions for low-q and high free cash flow firms. In addition, we find significant improvements in accounting profitability subsequent to repurchases, but not for low-q firms. Collectively, our results are most consistent with the signaling hypothesis.