| Abstract: | Converting preference shares (prefs) are a hybrid security involving mandatory conversion into a fixed value of ordinary shares (although some issues have an option-like conversion value payoff). This paper explains how prefs can be viewed as equivalent to an ordinary share issue plus a swap contract between “old” and “new” shareholders. This perspective is used to illustrate why prefs financing may be chosen when significant information asymmetries exist between management and outside investors. Other factors motivating the use of prefs are examined and their relevance for particular issuers and for the specific design of prefs securities analysed. |
