What is it about?
Companies can raise capital by issuing preferred stock, but relatively little is known about how their operating performance changes around these offerings. This study examines the operating performance of companies before and after they issue preferred stock. We find that their profit margins and return on assets generally deteriorate leading up to the issuance, reach their lowest levels in the year of issuance, and gradually recover afterward. This pattern differs from that previously documented for companies issuing additional common stock.
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Why is it important?
Preferred stock is an important source of corporate financing, yet relatively little research has examined the operating performance of companies that issue it. Our findings show that the decline in operating performance of preferred stock issuers begins before the issuance and is followed by a gradual recovery. This pattern contrasts with the operating performance of seasoned common stock issuers, which prior research found tends to improve before issuance and deteriorate afterward. The results also help explain previous evidence that preferred stock issuers experience only temporary common stock underperformance following issuance rather than persistent long-term underperformance.
Perspectives
The motivation for this study came from recognizing that, despite the use of preferred stock as a source of corporate financing, relatively little was known about the operating performance of companies that issue it. We wanted to examine how their operating performance changes before and after preferred stock issuance and whether this pattern helps explain their previously documented stock performance. Our findings show that operating performance deteriorates before issuance, reaches its lowest point in the issuance year, and gradually recovers afterward. I hope this study contributes to a better understanding of the financial condition of preferred stock issuers and the relationship between their operating and stock performance.
Dr. Hongbok Lee
Western Illinois University
Read the Original
This page is a summary of: The operating performance of preferred stock issuers, Applied Financial Economics, March 2009, Taylor & Francis,
DOI: 10.1080/09603100701857948.
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