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The Costs of Issuing Preferred Stock
Author(s) -
Bajaj Mukesh,
Mazumdar Sumon C.,
Sarin Atulya
Publication year - 2002
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/1475-6803.00038
Subject(s) - bond , convertible , stock (firearms) , business , convertible bond , monetary economics , hybrid security , sample (material) , common stock , economics , finance , private placement , investment banking , mechanical engineering , paleontology , chemistry , context (archaeology) , structural engineering , chromatography , engineering , biology
U.S. firms commonly use preferred stocks to raise external capital. Yet this hybrid security's issuance costs and offer yields have not been previously examined in a systematic manner. We analyze a sample of 3,042 U.S. preferred stocks issued between 1980 and 1999. We find that convertible issues, which are riskier than straight issues, entail higher gross spreads and other direct expenses. Scale, credit rating, and industry effects influence gross spreads and issuance costs. We also compare preferred stocks yields with various bellwether bond yields. Our results support the tax‐based argument that suggests that yields on preferred stocks should be lower than comparable risky bonds.