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Raising Capital Using Monthly Income Preferred Stock: Market Reaction and Implications for Capital Structure Theory

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  • Paul Irvine
  • James Rosenfeld

Abstract

We examine the impact of selling Monthly Income Preferred Stock (MIPS) on the common share prices of the issuing firms. We find that issuing MIPS to retire preferred stock raises the value of the firm, and that government policy can significantly affect the present value of the tax savings. Using proceeds to retire bank loans negatively impacts common share value. This negative response is larger for MIPS users with lower credit ratings on their senior debt. These findings support the view that banks perform a valuable monitoring service, which, if removed, can invoke an adverse market reaction.

Suggested Citation

  • Paul Irvine & James Rosenfeld, 2000. "Raising Capital Using Monthly Income Preferred Stock: Market Reaction and Implications for Capital Structure Theory," Financial Management, Financial Management Association, vol. 29(2), Summer.
    • Handle: RePEc:fma:fmanag:irvine00
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    Citations

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    Cited by:

    1. Howe, John S. & Lee, Hongbok, 2006. "The long-run stock performance of preferred stock issuers," Review of Financial Economics, Elsevier, vol. 15(3), pages 237-250.
    2. George J. Benston & Paul Irvine & Jim Rosenfeld & Joseph F. Sinkey, 2000. "Bank capital structure, regulatory capital, and securities innovations," FRB Atlanta Working Paper 2000-18, Federal Reserve Bank of Atlanta.
    3. Kallberg, Jarl & Liu, Crocker H. & Villupuram, Sriram, 2013. "Preferred stock: Some insights into capital structure," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 77-86.
    4. Ravid, S. Abraham & Venezia, Itzhak & Ofer, Aharon & Pons, Vicente & Zuta, Shlomith, 2007. "When are preferred shares preferred? Theory and empirical evidence," Journal of Financial Stability, Elsevier, vol. 3(3), pages 198-237, October.
    5. Angel Huerga & Carlos Rodríguez-Monroy, 2019. "Mandatory Convertible Notes as a Sustainable Corporate Finance Instrument," Sustainability, MDPI, vol. 11(3), pages 1-26, February.
    6. Nandkumar Nayar, 2014. "Lyon Taming by the IRS: Evidence on Tax Deductions," EcoMod2014 7163, EcoMod.
    7. Hongbok Lee & Don Johnson, 2009. "The operating performance of preferred stock issuers," Applied Financial Economics, Taylor & Francis Journals, vol. 19(5), pages 397-407.
    8. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
    9. John S. Howe & Hongbok Lee, 2006. "The long‐run stock performance of preferred stock issuers," Review of Financial Economics, John Wiley & Sons, vol. 15(3), pages 237-250.
    10. O. Emre Ergungor & C. N. V. Krishnan & Ajai K. Singh & Allan A. Zebedee, 2004. "Bank seasoned equity offers: do voluntary and involuntary offers differ?," Working Papers (Old Series) 0414, Federal Reserve Bank of Cleveland.

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