When are preferred shares preferred? Theory and empirical evidence

Ravid, S. Abraham; Venezia, Itzhak; Ofer, Aharon R.; Pons, Vicente; Zuta, Shlomith

doi:10.1016/j.jfs.2007.06.003

Cited by 5 publications

(5 citation statements)

References 57 publications

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“…Several studies, such as those of Bessa (2017), Chatfield et al (2020), Lee & Figlewicz (1999), Moyer et al (1987), Ravid et al (2007), andRolfsson &Åkerlind (2018) have found empirical evidence in support of this theory, showing that PSIs have lower profitability and interest coverage ratios, weaker balance sheet positions, as well as higher levels of gearing and bankruptcy risk than non-issuers.…”

Section: Financial Distress Theorymentioning

confidence: 96%

“…For this reason, preference shares are often considered "debt with a tax disadvantage" (Chatfield et al, 2020), rendering the preference share route an expensive one relative to corporate debt (Elsaid 1969). However, the importance of debt's tax advantage over preference shares largely depends on the issuer's profitability and/or tax status, as well as the objectives of both issuers and investors (Ravid et al, 2007;Laurent, 2002). This could also be one of the considerations with regards to the Maltese organizations shying away from preference shares.…”

Section: Taxation Considerationsmentioning

confidence: 99%

“…Due to the significant impact of the tax shield on the cost of capital, as contended by Chatfield et al (2020) and Elsaid (1969) debt is still likely to be more attractive than preference shares to MLCs from a taxation perspective. Nevertheless, in agreement with Laurent (2002) and Ravid et al (2007), there may be other non-tax-related motives for issuing preference shares, and the tax position of certain MLCs may render the tax deductibility of preference shares irrelevant. 5.4.6 Do preference shares give rise to conflicts of interest?…”

Section: Are Preference Shares a Tax-disadvantaged Instrument?mentioning

confidence: 99%

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An Examination of Preference Share Issuance by Companies Listed on the Malta Stock Exchange

Ellul,

Manché,

Baldacchino

et al. 2024

JCGIRM

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This investigation addresses the issuance of preference shares by companies listed on the Malta Stock Exchange (MSE), identifying key determinants and obstacles associated with these initiatives. Semi-structured interviews were conducted with 27 stakeholders, including representatives from 23 MSE-listed companies (MLCs), one MSE official, two stockbrokers, and an advisor from a leading global accounting firm. An evaluation of the financial distress faced by issuers prior to the issuance of preference shares was also undertaken. Despite the establishment of the MSE in 1992, preference shares have been issued by only two listed companies, indicating their minimal utilization as financial instruments within the Maltese market. The findings reveal that preference shares are primarily issued to meet financing needs, support corporate expansion, prevent control dilution, capitalize on favorable market conditions, maintain balanced capital structures, and enhance debt capacity. However, several barriers hinder the issuance of preference shares, including limitations inherent to the Maltese capital market, low investor interest, perceived complexity, and a general lack of understanding regarding this hybrid financial instrument. The study underscores the necessity for improved educational efforts concerning preference shares and elucidates the distinctive characteristics of the local market.

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Section: Financial Distress Theorymentioning

confidence: 96%

Section: Taxation Considerationsmentioning

confidence: 99%

Section: Are Preference Shares a Tax-disadvantaged Instrument?mentioning

confidence: 99%

See 1 more Smart Citation

An Examination of Preference Share Issuance by Companies Listed on the Malta Stock Exchange

Ellul,

Manché,

Baldacchino

et al. 2024

JCGIRM

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“…Lewis & Verwijmeren (2011) add other parameters that make preferred stocks attractive instruments for corporate financing (reduction of income taxes, minimizing refinance costs, mitigation of management discretion costs). Ravid et al (2007) provide reasoning in the context of whole company performance indicators; the researchers showed how corporate profitability, tax and bankruptcy considerations affect company decision-making to include preferred stocks in the capital sources. Fibírová & Petera (2013) suggested an appropriate design for profit-sharing plans and the implementation of the participative management style as solutions for worker aversion to invest financial capital in their own firms.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

The Difference Between Preferred & Common Stocks in Europe from the Market Perspective

Brabenec¹,

Poborský²,

Saßmannshausen³

2020

JOC

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Companies listed on the stock market must devote a great deal of attention to their market position. They must increase their competitive advantage in the undeniably key process of the issuance of stocks. As the issuance of preferred stocks has increased after the last crisis and in the current period of low interest rates in Europe, they are becoming more favoured investment instruments, we decided to analyse the real properties of preferred stocks in Europe in order to increase the efficiency of joint-stock companies. Using a dataset comprising all companies having both common and preferred stocks issued and traded on European markets between 2009- 2016, we determined the relationship of risk (measured by beta coefficients) and price volatility among common and preferred stocks and bonds in Europe. Our findings show beta coefficients of preferred stocks as systematically lower than beta coefficients of common stocks. Considering a difference of up to 10% as negligible, however, preferred stocks showed a similar or higher beta coefficient than corresponding common stocks of the same company in 53% of cases, whereas for 33% of cases, the difference is only ±10%. Coefficients of variation in prices showed a similar relationship, with only a negligible portion of preferred stocks bearing fixed (stable) dividends. This result implies that currently traded preferred stocks in Europe in fact do not possess such characteristics they are typically said to have, and in many cases they incur as comparable a risk as do common stocks. This essential information should help to increase the efficiency and competitiveness of joint-stock companies.

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“…Preferred stocks represent securities confirming the investors share in the corporate assets. They are connected with the priority right to a share in profits in the form of dividends, which are usually fixed, and also with the priority right to a share in the liquidation balance; however, the holder of this security has no right to take part in the company management (Kallberg, Liu, & Villupuram, 2013;Ravid et al, 2007). By issuing preferred stocks, businesses increase their equity capital, but the existing proportions of the company owners' voting rights do not change (Rejnus, 2011).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Mezzanine Financing Instruments in Comparison to the Classic Financing Sources

Tetrevova

Svedik

2018

Business, Management and Education

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The paper deals with innovated financing in the form of mezzanine financing instruments (sources). The authors aimed to identify, characterize, and assess mezzanine financing instruments in comparison to the classic corporate financing sources. Mezzanine financing represents an innovated form of financing interconnecting the features of equity and debt. The paper specifies the sources and characterizes and assesses pros and cons of each of them. Subsequently, it presents an overall evaluation of mezzanine financing instruments in comparison to the selected equity and debt financing sources. This evaluation was performed on the basis of 14 set criteria using a binary scale.

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When are preferred shares preferred? Theory and empirical evidence

Cited by 5 publications

References 57 publications

An Examination of Preference Share Issuance by Companies Listed on the Malta Stock Exchange

An Examination of Preference Share Issuance by Companies Listed on the Malta Stock Exchange

The Difference Between Preferred & Common Stocks in Europe from the Market Perspective

Mezzanine Financing Instruments in Comparison to the Classic Financing Sources

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