AN INVESTIGATION OF PREFERRED STOCK FINANCING BY BANK AND NONBANK FINANCIAL INSTITUTIONS

Abstract

AbstractWe investigate the shareholder wealth effects of announcements of preferred stock issues made by financial institutions. Fixed‐rate straight preferred stock and convertible preferred stock issue announcements result in insignificant common share price responses. However, the average stock price reaction to announcements of adjustable‐rate preferred stock issues is positive and significant for banking firms. Our findings suggest that banks' common shareholders react positively to adjustable‐rate preferred stock issue announcements because such securities provide a relatively low‐cost way of increasing the primary capital used to satisfy legal minimum capital requirements without diluting common equity voting rights.