Preferred stock: Some insights into capital structure |
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| Affiliation: | 1. Thunderbird School of Global Management, United States;2. School of Hotel Administration, Cornell University, United States;3. Department of Finance and Real Estate, College of Business, Colorado State University, United States;1. Dongguk Business School, Dongguk University, 3-26 Pil-dong, Chung-gu, Seoul 100-715, Republic of Korea;2. College of Business, Ferris State University, Big Rapids, MI 49307, USA;3. 2E Calvin Hall, College of Business Administration, Kansas State University, Manhattan, KS 66506, USA;4. College of Business Administration, Kent State University, Kent, OH 44242, USA;1. Gabelli School of Business, Fordham University, 45 Columbus Avenue, Room 510, New York, NY 10023, USA;2. Montpellier Business School, 2300, avenue des Moulins, 34185 Montpellier, Cedex 4, France;3. Poznan University of Economics and Business, Institute of Finance, Department of Investment and Financial Markets, al. Niepodległości 10, 61-875 Poznań, Poland;4. Griffith Business School, Nathan Campus, Griffith University, 170 Kessels Road, Nathan, QLD 4111, Australia;5. Monash Centre for Financial Studies, Monash Business School, Monash University, Level 13, 30 Collins Street, Melbourne, VIC 3000, Australia;1. Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiaotong University, 211 West Huaihai Road, Shanghai 200030, China;2. College of Management and Economics, Tianjin University, 92 Weijin Road, Tianjin 300072,China |
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| Abstract: | This study analyzes the reactions of equity holders and bondholders to the announcement of 427 preferred stock issues. We document an average equity announcement effect of − 0.65%. This reaction is positively influenced by a number of measures of firm creditworthiness and transparency and is higher for bank issuers. The equity market reaction is negatively influenced by convertibility (and the moneyness of the embedded option) and by the firm's accounting treatment of the issue (specifically if the issue is classified as equity). We find that average credit default swap spreads decrease by 50 basis points after the issue announcement. This decrease is also larger for more creditworthy and transparent firms. Convertibility and the moneyness of the embedded option further decrease the CDS spread. In aggregate, the decrease in equity value is much smaller than the increase in the value of the issuer's debt. |
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