Preferred stock: Some insights into capital structure
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Corporate Finance.
Volume (Year): 21 (2013)
Issue (Month): C ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jcorpfin
Preferred stock; Capital structure; Credit default swap;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ericsson, Jan & Jacobs, Kris & Oviedo-Helfenberger, Rodolfo, 2004.
"The Determinants of Credit Default Swap Premia,"
SIFR Research Report Series
32, Institute for Financial Research.
- Hackbarth, Dirk, 2009. "Determinants of corporate borrowing: A behavioral perspective," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 389-411, September.
- Huckins, Nancy White, 1999. "An Examination of Mandatorily Convertible Preferred Stock," The Financial Review, Eastern Finance Association, vol. 34(2), pages 89-108, May.
- Chandy, P R & Hsueh, L Paul & Liu, Y Angela, 1993. "Effects of Preferred Stock Re-rating on Common Stock Prices: Further Evidence," The Financial Review, Eastern Finance Association, vol. 28(4), pages 449-67, November.
- Blau, Benjamin M. & Fuller, Kathleen P., 2008. "Flexibility and dividends," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 133-152, April.
- Pietro Veronesi & Luigi Zingales, 2009.
NBER Working Papers
15458, National Bureau of Economic Research, Inc.
- Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005.
"Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market,"
Journal of Finance,
American Finance Association, vol. 60(5), pages 2213-2253, October.
- Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers 10418, National Bureau of Economic Research, Inc.
- Amy Dittmar & Anjan Thakor, 2007. "Why Do Firms Issue Equity?," Journal of Finance, American Finance Association, vol. 62(1), pages 1-54, 02.
- Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
- Heinkel, Robert & Zechner, Josef, 1990. "The Role of Debt and Perferred Stock as a Solution to Adverse Investment Incentives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 1-24, March.
- Benston, George, et al, 2003. " Bank Capital Structure, Regulatory Capital, and Securities Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 301-22, June.
- Keith D. Harvey & M. Cary Collins & James W. Wansley, 2003. "The Impact of Trust-Preferred Issuance on Bank Default Risk and Cash Flow: Evidence from the Debt and Equity Securities Markets," The Financial Review, Eastern Finance Association, vol. 38(2), pages 235-256, 05.
- Pinegar, J Michael & Lease, Ronald C, 1986. " The Impact of Preferred-for-Common Exchange Offers on Firm Value," Journal of Finance, American Finance Association, vol. 41(4), pages 795-814, September.
- Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
- Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, September.
- Schneider, Paul & Sögner, Leopold & Veža, Tanja, 2011. "The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(06), pages 1517-1547, January.
- Walter I. Boudry & Jarl G. Kallberg & Crocker H. Liu, 2010. "An Analysis of REIT Security Issuance Decisions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(1), pages 91-120.
- Kim, Dong H. & Stock, Duane, 2012. "Impact of the TARP financing choice on existing preferred stock," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1121-1142.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.