How Do Common Stocks Perform After Companies Issue Preferred Stock?

What is it about?

Companies can raise capital by issuing preferred stock, but little research has examined how their common stocks perform after these offerings. This study examines the long-term common stock performance of companies that issue preferred stock. We find significant abnormal underperformance during the first year after issuance, but no consistently significant abnormal performance over longer periods. This pattern differs from the substantial long-term underperformance previously documented for companies issuing common stock or debt.

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Why is it important?

Companies issuing common stock or debt have been shown to experience substantial stock underperformance for several years after issuance. Our findings show that preferred stock issuers exhibit a different pattern: significant abnormal underperformance is limited primarily to the first year after issuance and does not persist consistently over the longer term. The relatively better long-run performance of preferred stock issuers is driven primarily by financial firms, which often issue preferred stock to satisfy regulatory capital requirements. These findings provide useful insights into how the type and motivation of security issuance may be related to subsequent stock performance.

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