LONG-RUN OPERATING PERFORMANCE OF PREFERRED STOCK ISSUERS

In this paper, we study the long-run operating performance of preferred stock issuers. We use three different measures of operating performance; pre-tax cash flows, profit margin and return on assets. We study the performance of industrial firms, financial firms, and utilities separately, as well as the performance of the whole sample. Our results indicate that the operating performance of preferred stock issuers as a whole declines in the three-years before the issue. We find that profitability continues to decline after the issue. This finding is consistent with earlier findings on bond and common stock issuers. We also find that the decline in profitability is more pronounced for financial firms, although the cash flows of financial firms increase after the offering. The results show that the operating performance after the issue is worse for firms that raise large amounts of capital through the issue. There is also some evidence that preferred stock issuers with information asymmetry have lower operating performance following the issue.