The choice between publicly issued and privately placed preferred stocks

Purpose – The purpose of this paper is to empirically test information asymmetry and agency conflicts hypotheses, as to firm's choices in selling preferred stock in public and private markets. Design/methodology/approach – Using firm-level preferred stock issue data, the author uses a multivariate logistic model to see a firm's different preferred stock selling decisions among public market, rule 144A market, and non rule 144A market. The paper examines the impact of the firm's idiosyncratic risk and cash flow volatility. Findings – It is found that private placement (non rule 144A) firms have higher information asymmetry than public offering firms. In addition, private placement (rule 144A) firms have higher operating risk than public offering firms. The non Rule 144A market and rule 144A market for preferred stocks are significantly different. Research limitations/implications – This topic can be further studied with more detailed, preferred stock issue data. Originality/value – The paper extends our understanding of the preferred stock market selling mechanism.