An Examination of Mandatorily Convertible Preferred Stock

Nancy White Huckins

The Financial Review, 1999, vol. 34, issue 2, 89-108

Abstract: I investigate the determinants of the use of mandatorily convertible preferred stock and assess market reaction to its issue. The security is dividend enhanced and converted into common stock within four years. Issuers have high debt ratios, low interest coverage, and bankruptcy risk. Market response to the issue was neutral suggesting the preferred issue resolved the lemon problem associated with common stock. Firms' Z-scores and abnormal returns are inversely related indicating the issues reduced financial distress. Market response was most positive for low risk firms with high cash flows. Copyright 1999 by MIT Press.

Date: 1999
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