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Preferred Stock (-->Wiki)

Post by Barry Barnitz » Thu Sep 20, 2007 2:35 am

An expanded version of this page is available on The Bogleheads Wiki.

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A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. These rights include priority in receiving dividends and precedence (after creditors) over common stock shareholders in claims to corporate assets upon liquidation. Preferred stock, as a yield investment, acts similar to a fixed income security, the price reacting primarily to changes in interest rates.

Investopedia provides definitions and primers on the different types of preferred stocks.


Definitions

Preferred Stock
Callable Preferred Stock
Convertible Preferred Stock
Participating Preferred Stock
Cumulative Preferred Stock


Primers

A Primer on Preferred Stock
A Short Guide to Preferred Stocks and the S&P U.S. Preferred Stock Index
Introduction To Convertible Preferred Shares

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Last edited by Barry Barnitz on Mon Jun 30, 2008 11:48 am, edited 4 times in total.
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Preferred Stock: Academic Papers

Post by Barry Barnitz » Thu Sep 20, 2007 2:58 am

Papers

1. Cost Of Issuing Preferred Stock: An Empirical Analysis by Bajaj, Mukesh , Mazumdar, Sumon C. and Sarin, Atulya, (November 2000)
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 preferred stock issues by publicly traded U.S. firms between 1980 and 1999. We find that convertible preferred stock, which are riskier than straight preferred stock, entail higher gross spreads and other direct expenses. Gross spreads and issuance cost are influenced by scale, credit rating and industry effects. We also compare yields on preferred stocks to that of various bellwether bond yields (such as the 30-year Treasury and AAA and BBB corporate bonds). Our results strongly supported the conventional tax-based argument that suggests that yields on preferred stocks should be lower than comparable risk corporate bonds.


2. The Offer Yield of Preferred Stocks by Bajaj, Mukesh , Mazumdar, Sumon C. and Sarin, Atulya, Stocks" (February 2002)
Despite the growing popularity of preferred stocks, no previous study has empirically examined their offer yields relative to comparable bonds. Like debt preferred stocks also offer a constant yield to investors. But preferred stocks have longer durations than bonds and are also subordinate to bonds. Hence, preferred stocks are generally riskier than bonds. This "risk effect" is likely to increase preferred stocks' offer yield relative to bonds. However, preferred stock dividends are often tax-deductible to the corporate investor. This tax benefit offsets the risk effect. We empirically examine the net impact on the yield differential between preferred stocks and bonds by considering "matched pairs" of these securities issued between January, 1982 and September 2000. We find that the risk effect dominates the tax effect for financial firms and risky issuers while the tax effect dominates for utilities and highly rated issues.


3. The Debt-Equity Mix in Preferred Stock and Adverse Selection Costs: An Empirical Investigation by Illessy, Janos K. and Shastri, Kuldeep , (November 2000)
This paper investigates whether the hybrid nature of preferred stock is reflected in its market microstructure and, in particular, in its information dissemination process. Theory would suggest that information flows, informational asymmetry and transactions costs of trading associated with various kinds of preferred stocks would differ depending on whether debt-type or equity-type asset characteristics dominate in them. Specifically, debt dominated assets are expected to rely more heavily on non-firm specific information, be exposed to adverse selection to a lesser extent and have lower information asymmetry induced transactions costs than securities dominated by equity features. This paper empirically tests this prediction. The main result in the paper is that asset characteristics affect microstructure parameters. In particular, the higher the equity dominance in straight preferred stock, the lower the public information induced volatility and the higher the information asymmetry induced transactions cost and the adverse selection component of the spread. Such relations are not observed in the case of convertible preferred stock. This is attributed to the existence of a lead-lag relationship between this security and its underlying common stock. Finally, the results also indicate that infrequent trading has a significant impact on the adverse selection component of the spread.
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Preferred Stock - Individual Issues

Post by xenial » Thu Sep 20, 2007 10:14 am

http://quantumonline.com/ is a unique free resource for information on individual preferred stocks and related income producing securities. A simple registration process is required.

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