The Economic Consequence Of Preferred Stock Financing

As an important tool in the international finance,preferred stock has been popular in the west in the last century.A long-term and stable preferred stock policy is one sign of a mature capital market.Since a long time ago,there has been a few problems troubling China’s capital market,such as the high difficulty of financing,the high cost of financing,the low proportion of direct financing,the single bond types and limited investment channels,which hinder the healthy development of capital market.In order to solve this problem,on November 30th 2013,the state council put forward the guidance of the pilot implementation of preferred shares.At the same time,to accelerate the reform and development of capital market and implement the national laws,regulations and policies seriously,on March 21st 2014,China’s Securities Regulatory Commission(CSRC)released the pilot measures for the administration of preferred stock.The purpose of the new regulation is to expand the traditional financing channels,satisfy the demand of the construction of the multi-level capital market,improve the corporate governance structure,protect the rights and interests of investors and promote the cash dividends of listed companies.Overall,this new policy provide a good foundation to promote our country capital market system reformAs "hybrid" securities between common stock and bond,preferred stock provides enterprises with an important financing channel.Financing in the form of preferred stock,listed companies will be influenced in all kinds of aspects,such as enterprise finance,corporate governance and common shareholders.In addition,CSRC’s new policy is an innovative regulation,so the capital market is bound to react on the implementation of preferred stock system in our country.Further,as a new means of financing,the cost of preferred stock financing should be different from that of bond financing and common stock financing.Therefore,what are the implementing effects of the new policy is an important question.This article will take the preferred stock financing system as the research object,based on the financing theory,signaling theory and principal-agent theory,to provide corresponding empirical evidence from the perspective of "micro enterprises-market reaction".This paper consists of seven chapters.Below are outlines of each chapterChapter 1 is the introduction which briefly introduces the research questions,institutional background,ideas and potential contributionsChapter 2 summarizes related literature and provides comments on related theory,including the influence of preferred stock financing on the value of enterprises,the motivation of issuing preferred stock,and the form or application of preferred stock financingChapter 3 introduces institutional background on preferred stock financing at home and abroad.This paper first analyses the preferred policy evolution in different countries abroad,then combined with the development and current situation of preferred stock in our country,points out the feasibility and necessity of implementation of preferred stock in China’s capital market.Chapter 4 takes KangMei Pharmaceutical as example and studies effects on various aspects of this company which are caused by the preferred stock financing.This chapter combines case analysis and empirical research and investigates the influence of the issue of preferred shares on companies and investors,to test whether financing theory or principal-agent theory is verified interpreted in preferred shares issued.Chapter 5 investigates the entire capital market’ s response on the preferred stock system during the pilot measures for the administration of the preferred stock issued,and further compares the different reaction of the investors in stock market and bond market,and to explore whether the system of preferred shares in the stock market and bond market reached non-zero-sum game.Chapter 6 investigates the announcement effect during the issue of preferred stock,and further compares the preferred stock financing with equity financing and debt financing,to explore the difference between the cost of financingChapter 7 sums up the research findings of this paper,the caveats about this research and point out the direction for further research.This paper draws the following conclusions:1.Financing theory and principal-agent theory can partly explain the reason for the enterprise to issue preferred stock,and financing theory’s explanation ability is stronger.2.Issuing preference shares makes enterprise gain long-term and stable financial support,which is helpful for enterprises to expend scale and reach better industrial layout,and promotes enterprise’s value enhancement.The use of preferred stock to raise money to replace part of short-term financing bonds can optimize the financial indicators,reduce the financial leverage,thus can improve the solvency of enterprises.3.During the pilot measures for the administration of the preferred shares issued,the stock market and bond market are significantly positive market reactions.Preferred stock financing for China’s capital market brings more wealth effect than substitution effect.To a certain extent,stock market and bond market have formed a non-zero-sum game and achieved a win-win result.4.Preferred stock financing announcement effect is positive,and the announcement effect is better than that of equity financing and debt financing,which means that at this stage,the cost of the preferred stock financing is much lower than that of equity financing and debt financing.This paper explores the economic consequence of preferred stock financing institution,below are main innovations and contributions of this paper:1.Combined with the current needs of multi-level capital market system construction in our country,this paper points out the necessity of the development of preferred stock.This paper offers a new approach to analyzing the influence of preferred stock system on different interest subjects.2.This paper further improves the relevant contents of corporate finance theory and deepens the study of western classical financing theory.This paper provides a theoretical basis for the constant development of the preferred stock system in our country and also perfects the relevant theories of enterprise financing.3.This paper use economic and finance theories to explain the working mechanism of preferred stock financing,so provide empirical support to these theories.Considering the study of preferred stock at the present stage in China only stays in normative analysis,empirical research results of this paper significantly provides important empirical evidence.