How Does Corporate Governance Differ for Companies That Issue Preferred Stock?

What is it about?

Companies use various corporate governance mechanisms to align the interests of managers and shareholders and reduce conflicts between them. This study examines whether companies that issue preferred stock differ from other companies in three important governance characteristics: managerial equity ownership, board size, and block shareholder ownership. We find that preferred stock issuers have significantly lower managerial equity ownership and larger boards than comparable non-issuers, while there is no significant difference in block shareholder ownership.

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Why is it important?

Preferred stock can influence corporate governance because its use may help reduce conflicts of interest between managers and shareholders. Our findings show that preferred stock issuers have significantly lower managerial equity ownership than comparable firms. This result is consistent with the idea that preferred stock and managerial equity ownership can both help reduce agency costs, thereby reducing the need for higher managerial ownership when preferred stock is used. We also find that preferred stock issuers have larger boards, while block shareholder ownership does not differ significantly between issuers and non-issuers. These findings provide useful insights into the relationship between corporate financing choices and corporate governance.

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