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Preferred stock financing Wong, Chuk-Yan


This paper uses the multinomial logit model to investigate the corporate financing choice among bonds, preferred stock, and common stock. The empirical evidence suggests that firms issuing preferred stock are characterized by a number of financial attributes. Compared to firms that issue bonds, firms that issue preferred stock are smaller, less liquid, and riskier. Compared to firms that issue common stock, firms that issue preferred stock are bigger, less liquid, riskier, and having larger growth opportunities. In addition, the results suggest that an industry difference exists in the choice between common stock and preferred stock. Utilities tend to favor the use of the former. The results also lend partial support to the financial distress hypothesis which holds that financially distressed firms are more likely to issue preferred stock. In addition, the empirical evidence is also consistent with the solution to adverse investment incentives hypothesis which states that firms can use preferred stock to eliminate the over- and under-investment incentives caused by common equity and debt financing. Although the results are generally mixed, they do provide some valuable information about the characteristics of the firms that issue preferred stock.

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