Taxes and the Choice of Issuing Preferred Stock vs. Debt

This study provides descriptive evidence on the link between a firm's expected marginal tax rate and its use of preferred stock as an alternative to financing with long-term debt. Regressions are estimated on a sample of industrial firms that issued preferred stock and a control group, matched...

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Bibliographic Details
Published in:The Journal of the American Taxation Association 2002-03, Vol.24 (1), p.29-45
Main Authors: Ely, David P, Houston, Arthur L. Jr, Houston, Carol Olson
Format: Article
Language:English
Subjects:
Business enterprises
Capital stock
Corporate debt
Correlation analysis
Debt financing
Depletion allowances
Economic aspects
Hypotheses
Investments
Long term debt
Preferred stock
Preferred stocks
Regression analysis
Securities
Stock offerings
Studies
Tax credits
Tax rates
Taxation
Taxes
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Summary:This study provides descriptive evidence on the link between a firm's expected marginal tax rate and its use of preferred stock as an alternative to financing with long-term debt. Regressions are estimated on a sample of industrial firms that issued preferred stock and a control group, matched on industry and size, that contemporaneously issued long-term debt. Substantial tax effects are found for a full sample of firms that issued any type of preferred stock, as well as a large subsample that issued only convertible preferred stock, frequently used to facilitate mergers and acquisitions. For the typical firm, a decrease in its expected marginal tax rate from the 75th to the 25th percentile is associated with a 33 percent increase in the likelihood it will issue preferred stock. This financing behavior is consistent with a goal of enhancing tax benefits.
ISSN:0198-9073
1558-8017
DOI:10.2308/jata.2002.24.1.29