Journal of Economics and Finance

, Volume 16, Issue 1, pp 11–25 | Cite as

The effect of non-convertible preferred stock retirement on shareholder wealth

  • Ramesh Rao
  • R. Charles Moyer


In this paper the authors examine the common stock price behavior of firms that call their non-convertible preferred stock. The findings for the entire sample of preferred stock calls are consistent with the Modigliani and Miller (MM) leverage hypothesis that preferred stock financing adds no value to the firm. However, for those firms whose preferred stock was completely eliminated from the capital structure, a significant, positive announcement effect is observed. This finding is consistent with an information signaling effect related to the earnings prospects and tax status of the calling firms and also is suggestive of a burdensome covenant effect. No evidence is found to support the free cash flow theory of common stock price reactions to preferred stock calls.


Capital Structure Free Cash Flow Common Stock Shareholder Wealth Prefer Stock 
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Copyright information

© Springer 1992

Authors and Affiliations

  • Ramesh Rao
    • 1
  • R. Charles Moyer
    • 2
  1. 1.Texas Tech UniversityLubbock
  2. 2.Wake Forest UniversityWinston-Salem

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