The Impact Of Preferred Stock On The Price Of Common

The final version of preferred stock trial is released on March 21,2014. As an important finance product, preferred stock could enhance capital, decrease leverage and avoid changing of control. Preferred stock means a lot for improving our capital market. Studying preferred stock will help us better understand and apply this finance tool.Current research papers on preferred stock in China are mainly about theory, lacking empirical analysis. One highlight of this paper is using empirical modeling to discuss the effect of preferred stock. This paper uses classical event study method in finance to measure the effect of preferred stock, conducts linear regression analysis to explain the effect of preferred stock, and makes comparison between preferred stock and private placement.Our paper finds that preferred stock trial brings positive effect to the common stock price of related company. Our regression models show that cumulative abnormal return of preferred stock trial is negatively correlated to price to earning ratio, price to book ratio and largest common stock holder share, positively correlated to turnover, return volatility, return on equity and liability to asset ratio. The announcement of issuing preferred stock brings positive effect to the common stock price of related company. Regression models show that cumulative abnormal return of announcement of issuing preferred stock is negatively correlated to price to book ratio and return volatility, positively correlated to turnover, return on equity and largest common stock holder share. The announcement of issuing preferred stock brings positive effect to the common stock price of related bank. The announcement of private placement also brings positive effect to the common stock price of related bank. The cumulative average abnormal return of announcement of issuing preferred stock is similar to that of announcement of private placement.Some suggestions are put forward. The company might use preferred stock to raise capital and improve structure. The investor could use event-driven investment strategy based on effect of announcement of issuing preferred stock. The regulator should pay attention to variation of situation and take proper actions in time. The investment bank should catch the opportunity of preferred stock, and positively establish service system related to preferred stock, making contributions to the development of preferred stock market.