The effect of non-convertible preferred stock retirement on shareholder wealth

The Effect of Non-Convertible Preferred Stock Retirement on

Shareholder Wealth

Ramesh Rao and R. Charles Moyer

ABSTRACT

In this paper the authors examine the common stock price behavior of firms that call their non-convertible preferred stock. The findings for the entire sample of preferred stock calls are consistent with the Modigliani and Miller (MM) leverage hypothesis that preferred stock financing adds no value to the firm. However, for those firms whose preferred stock was completely eliminated from the capital structure, a significant, positive announcement effect is observed. This finding is consistent with an information signaling effect related to the earnings prospects and tax status of the calling firms and also is suggestive of a burdensome covenant effect. No evidence is found to support the free cash flow theory of common stock price reactions to preferred stock calls.

Introduction

This study concerns the behavior of common stock returns in response to calls of non-convertible preferred stock. Although previous researchers have examined the effect of convertible preferred calls (Mais, Moore, and Rogers 1989), of exchange offers involving preferred stock (Masulis 1980a, Masulis 1983, Mikkelson 1981, and Pinegar and Lease 1986), of common stock repurchases (Dann 1981, Masulis 1980b, and Vermaelen 1981), and of new straight and convertible preferred stock issuances (Lima and Pinegar 1988 and Mikkelson and Partch 1986) on common stockholder wealth, the announcement impact of straight preferred stock calls on stock prices has received little attention. Preferred stock calls provide an additional opportunity to test competing hypotheses regarding the valuation impacts of capital structure changes.

Overall, the findings support the Modigliani and Miller leverage hypothesis that preferred stock financing does not affect the value of a firm's common equity.

Ramesh Rao is Assistant Professor of Finance, Texas Tech University, Lubbock, 7X 79409. R. Charles Moyer is lntegon Professor of Finance, Wake Forest University, VvTnston-Salem, NC 27109.

11

JOURNAL OF ECONOMICS AND FINANCE

However, when the preferred stock call eliminates all the firm's preferred stock, significant positive common stock announcement returns are observed. This result is most consistent with an information signaling effect related to the earnings prospects and tax status of the calling firm. Only weak support is found for an "elimination of burdensome covenants" effect.

The results are particularly interesting when contrasted with those of Mikkelson and Partch (MP) (1986) and Lima and Pinegar (LP) (1988). MP found insignificant common stock price responses to the announcement of preferred stock offerings for a sample of 14 firms. However, the MP sample included only 5 non-convertible preferred offerings and potentially included offerings from utility firms. ~ LP found that the market's reaction to preferred issue announcements depends on the industry characteristics of the issuing firm. Industrial firm offerings of convertible preferred stock result in significant, negative announcement effects on common stock returns. Straight preferred stock offerings result in insignificant returns. LP attribute these results to signaling effects.

Hypothesized Effects of Preferred Stock Calls

The hypotheses to be tested include the Modigliani and Miller (MM) leverage hypothesis, the information signaling hypothesis, the burdensome covenants hypothesis, and the free cash flow hypothesis.

Modigliani and Miller (1963) postulate that an increase in debt, ceteris paribus, can increase firm value because of the tax deductibility of interest payments. Although MM do not analyze the effect of preferred stock on firm value in their 1963 paper, they show in a subsequent empirical paper dealing with electric utilities (1966) that preferred stock financing will not affect firm value. MM argue that the cheaper cost of preferred stock (relative to common stock) is completely offset by a higher rate of return required by common stockholders for assuming a greater degree of financial leverage. If the MM framework holds, common stockholders should be indifferent to preferred stock financing. Hence, the MM leverage hypothesis predicts that preferred stock redemptions will not impact firm value, other things held constant. However, if the preferred stock redemption is financed with debt, then (following the MM tax arguments) a positive effect may be observed.

Ross (1977) and Pinegar and Lease (PL) (1986) argue that the redemption of preferred stock may convey new information about the firm's future prospects. According to Ross, leverage-increasing actions signal an increase in firm value. Conversely, leverage-decreasing actions, such as the calling of preferred stock should decrease the market's perception of firm value. In an empirical test of this hypothesis PL find a positive common stock valuation effect associated with leverage-increasing exchanges of preferred stock for common stock. They attribute this finding to a signaling effect. They find a small negative impact associated with leverage-decreasing exchanges of common Stock for preferred stock. However, the PL results relate to exchange offers. The authors consider straight preferred stock calls not associated with exchanges of one security for another. Straight preferred

12

The Effect of Non-Convertible Preferred Stock Retirement on Shareholder Wealth

stock calls may transmit information to investors very different from preferred stock exchanges for common stock.

In contrast, Ross, Miller and Rock (MR) (1985) argue that unexpected outside financing conveys a negative signal to the market about a firm's prospects. A negative effect associated with external financing also is consistent with Myers and Majluf (1984). Conversely, unexpected redemptions should convey positive information to the market about the firm's prospects.

Consistent with MR, Moyer, Chatfield and Mart (MCM) (1987) found that firms facing impending financial distress are more likely to issue preferred stock than financially healthy firms. MCM attributed the tendency for distressed firms to issue preferred stock to a lower after-tax cost of preferred stock (including expected bankruptcy costs) relative to debt and common equity costs for a distressed firm anticipating a zero marginal tax rate. Consistent with the MCM financial distress argument, LP found significant, negative preannouncement (day -90 to day -2) effects on common stock returns associated with straight preferred stock offerings of industrial firms. Finnerty (1986, 21) suggests that preferred stock financing will be advantageous to a company only if "the company does not expect to pay income taxes over the life of the preferred stock issue." The announcement of a planned preferred stock redemption may therefore signal an improvement in the firm's earnings prospects. Houston and Houston (1990) found similar evidence that preferred stock issuing firms have significantly lower tax rates than non-issuing firms.

The burdensome covenants hypothesis suggests that a primarY reason for calling a preferred stock issue is to eliminate one or more restrictive covenants on the preferred stock. This hypothesis predicts a positive common stock reaction to preferred stock calls, if the call relaxes restrictive covenants, thus allowing the firm to undertake profitable, though risky, investments. Vu (1986) found evidence in support of this hypothesis in his study of calls of non-convertible bonds. However, Mais, Moore and Rogers (MMR) (1989) found that covenants on preferred stock tend to be less restrictive than those found on bond issues. They also found that the restrictiveness of the preferred covenants does not the affect stock price reaction to convertible preferred stock calls.

A positive common stock price response to the calling of preferred stock also would be consistent with Jensen's free cashf low hypothesis (Jensen 1986), because the calling of preferred stock reduces the amount of cash under control of managers. During the two months before and after the call announcement, only one of the firms included in the sample reported a new equity or debt issue) Consequently, the preferred stock calls included in this study were most likely financed primarily out of the existing cash resources of the f irm)

Data

The data set is comprised of announcement events of non-convertible preferred stock calls. Utility preferred stock calls are not included in the final data set because of the unique regulatory treatment accorded utility preferred stock financing. 4

13


Initially identified from the annual editions of Moody's Dividend Record were 145 preferred stock call events during the period 1968 to 1985. Events in the final sample also met the following three criteria:

1. The redemption was announced in the Wall Street Journal (WSJ). 2. The redemption was not part of a merger or acquisition. 5 3. The firm was domiciled in the U.S.

Twenty-two events met these criteria. Although small, this sample is larger than the subsample of straight preferred industrial offerings analyzed by MP (1986) and by LP (1988). 6

Table 1 contains detailed information on relevant characteristics of the securities that were called, including the nature of the covenants. The sample is divided into two subsets. The first subset includes the ten cases where the preferred call resulted in the complete elimination of preferred stock from the firm's capital structure. The second subset includes twelve firms that had preferred stock outstanding after the call. Virtually all the preferred stock issues had detailed covenants covering voting rights, mergers, issuance of additional securities of equal or senior standing, and dividend payments. In those cases where there was only partial elimination of preferred stock, the covenants on the remaining, outstanding preferred stock issues were similar (in all but three cases) to those on the preferred stock issue that was eliminated.

Methodology and Empirical Results

Average daily portfolio returns for the sample of firms for 121 days centered on the announcement date were computed. A two-day announcement period was used, where day 0 is the publication date of the Wall Street Journal (WSJ) containing the announcement and day -1 is the prior trading day. The average daily portfolio returns (AVR0 are calculated as the arithmetic mean of the individual firms' common stock returns. The returns were computed from daily price and dividend data obtained from Standard and Poor's NYSE and ASE Daily Stock Price Record. The impact of preferred stock call announcements on common stock returns is measured primarily using returns unadjusted for market or systematic risk effects, because Brown and Warner (BW) (1980 and 1985) have shown that these adjustments are not needed and may reduce the power of the tests in situations where the security returns are cross-sectionally independent, as is true in this case.

The daily average common stock returns for the sample of 22 preferred stock call events are presented in Table 2. Also shown are the cumulative average returns from day -60 through any day t. and the number of firms in the sample exhibiting positive returns. The table may be broken into roughly three sections: (1) the preannouncement period, from day -60 to day -2; (2) the announcement period, covering day -1 and day 0; and (3) the post announcement period, from day + 1 to

14


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16

The Effect o f Non-Convertible Preferred Stock Retirement on Shareholder Wealth

day 0) is not significantly different from the mean comparison period return (day +21 to day +60) is tested using the following test statisticT:

t = [ A V R ~ - 2 ( A V R ) ] I S2(AVR,) (1)

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0

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t=+21

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S 2(A VRt) = 1/40 ~, (A VR t - Z VRc) 2 t-§

(2)

The test statistic is distributed as a student t with 40 degrees of freedom under the null hypothesis. The statistic assumes the returns are independent, identically distributed, and normal. 8 A statistic of this form has been used widely in event studies, for example by Dann (1981) and Masulis (1980). Because of the small sample sizes, the non-parametric Wilcoxon signed ranks test also is performed and the test results are shown in the notes to Table 2.

The results of the t-test shown at the bottom of Table 2 confirm that common stock returns for the two-day announcement period are not statistically different from the comparison period returns. The absence of statistically significant differences is supportive of the MM leverage hypothesis and indicates that, on average, common stockholders are indifferent to preferred stock call announcements. These results are consistent with the findings of Mikkelson (1981), MP (1986), and LP (1988) and do not support the Jensen free-cash-flow hypothesis. The non-parametric tests confirm the parametric t-test results.

For comparison purposes, we also have examined the common stock returns about the announcement of preferred stock calls using returns adjusted for overall market effects and for the return predictions from the single index market model (SIMM). The SIMM is estimated in the form of:

R . = § + e . . (3)

where, Ri. t is the return on day t on the common stock for the firm (i) calling its preferred stock, R~t is the return on the CRSP equal-weighted market index for day t, and a~ and b i are security specific parameters for firm i.

The market adjustment to individual period returns is computed by subtracting the return on the CRSP equal-weighted index for the same day. The SIMM market

17


model adjustment is computed by subtracting the return predicted from the SIMM, estimated for the period t = -300 to t = -61.

TABLE 2

DAILY PORTFOLIO RETURNS FOR THE ENTIRE SAMPLE OF PREFERRED STOCK CALL ANNOUNCEMENTS

Day AVR~* CAVRt** No pos. Day AVR t

-60 -0.0034 -0.0034 9 -50 0.0005 0.0015 10 -40 -0.0023 0.0009 9 -30 0.0058 0.0034 13 -20 0.0003 0.0228 11

-10 0.0039 0.0391 8 -9 0.0123 0.0513 12 -8 -0.0021 0.0492 7 -7 0.0042 0.0534 10 -6 0.01130 0.0634 16 -5 -0.0014 0.0620 12 -4 -0.0027 0.0593 3 -3 0.0030 0.0623 7 -2 0.0006 0.0629 8

-1 0.0029 0.0658 10 0 0.0008 0.0666 12

CAVR~ No pos.

+ 1 -0.0011 0.0655 9 + 2 0.0013 0.0669 8 + 3 -0.0026 0.0642 9 + 4 -0.0017 0.0625 9 + 5 -0.0003 0.0622 9 + 6 0.0044 0.0666 9 + 7 -0.0046 0.0621 9 + 8 -0.0013 0.0607 9 + 9 0.0005 0.0612 10

+ 10 0.0047 0.0659 14

+ 2 0 0.0033 0.0921 10 + 3 0 -0.0013 0.0997 11 + 4 0 0.0008 0.0980 6 + 5 0 -0.0005 0.1120 7 + 6 0 -0.0006 0.0931 9

Notes: The t-statistic for the significance of the two-day announcement period return 0.71, is not significant at the 10 percent level. The Wilcoxon signed ranks test statistic, 156.0, also is not statistically significant. The two-day announcement period excess returns using the market adjusted and single index market models were estimated to be 0.0041 and 0.0020 respectively. These were not statistically significant.

*AVRt is defined as the average of the common stock returns for each firm on day t. **CAVRt is defined as the sum of the AVR t from day -60 to day t.

Both the market-adjusted model and the SIMM model confirmed the lack of significant announcement effects and neither was sensitive to the estimation period used. The two-day announcement period excess returns using the market adjusted and the S I M M models were estimated to be 0.0041 and 0.0020, respectively. Neither is statistically significant.

18


It is conceivable that our finding of no significant overall announcement impacts masks the validity of alternative hypotheses at the individual firm level. To shed further light on the different hypothesized effects, several cross-section simple regressions were analyzed. Specifically, we regressed the two-day excess returns (using the comparison period model) against the following variables:

1. PROP:

2. CUMRES:

3. EXTINGI:

4. EXTING2:

the dollar amount of called preferred stock as a percent of the capital structure (long-term debt, preferred stock plus common equity). the cumulative excess returns during the pre-event period (day -60 to day -2). a dummy variable equal to one if the redeemed preferred stock resulted in complete elimination Of preferred stock from the firm's capital structure; zero otherwise. same as EXTING~ but, in addition, in the case of partial preferred stock redemptions, the dummy is set to one if the remaining preferred stock issues have less restrictive covenants than the called preferred stock issue.

The variables, C UMRES , and EXTING~, proxy for information signaling effects. To the extent that the preferred stock redemption "confirms" the market's assessment of positive future prospects for the firm, a significant positive relationship between announcement period returns and pre-event cumulative excess returns (CUMRES) can be interpreted as support for the information signaling effect. The dummy variable, EXTINGt, tests the sensitivity of information signaling effects to complete versus partial eliminations of preferred stock from a firm's capital structure. The Finnerty tax argument and the MCM financial distress argument imply that only events resulting in the total extinguishment of preferred stock from a firm's capital structure should result in positive signaling effects.

To test the burdensome covenants hypothesis, the sample was divided into preferred stock calls that resulted in less restrictive covenants or totally eliminated preferred stock covenants, and calls that did not change the covenant restrictions. This distinction is captured in variable EXTING 2. This dummy variable is set equal to one for complete preferred stock extinguishment cases because they eliminate all burdensome covenants associated with preferred stock. The dummy variable also is set equal to one for those partial extinguishment cases where the remaining outstanding preferred stock issues have less restrictive covenants than the issue that was redeemed. A positive, significant coefficient for the EXTING 2 variable would indicate a positive market reaction in all cases where covenant restrictions are reduced and thus would support the burdensome covenants hypothesis.

The free cash flow theory predicts positive common stock effects associated with a reduction in the preferred stock outstanding if the reduction is funded from "free-cash" resources of the firm. Because the firms included in this sample apparently financed the preferred stock calls out of existing cash resources (with one exception), the free cash flow theory requires a significant positive relationship

19


between announcement period excess returns for all firms and the relative size o f the preferred stock redemption (PROP). The free cash f low theory implies no relationship between announcement period excess returns and both the pre-event cumulative excess returns and the extinguishment variables.

Ross (1977) argues that a leverage decreasing transaction, such as calling preferred stock, should decrease the marke t ' s perception o f the f i rm 's value. Accord ing to Ross, a significant negative relationship would be expected for the P R O P variable. The M M leverage-tax hypothesis implies a zero coefficient for all four variables.

TABLE 3

CROSS-SECTIONAL TESTS OF ANNOUNCEMENT PERIOD RETURNS

Variable Standard Regression Rank Transformed Regression

Coefficient R-square Coefficient R-square

PROP 0.004 0.08 0.273 0.07 (1.28) (1.27)

CUMILES 0.067 0.16 0.421 0.18 (2.00)* (2.07)*

EXTING 0.037 0.40 8.067 0.40 (3.71)*** (3.66)***

EXTING*CUMRES 0.116 0.26 0.669 0.37 (2.68)** (3.46)***

EXTING 2 0.019 0.10 3.855 0.09 (i .50) (1.40)

Note: Figures in parentheses are t-statistics; PROP = the dollar amount of called preferred stock as a percent of the capital structure; CUMRES = the cumulative excess returns during the pre-event period (day -60 to day -2); EXTING 1 = a dummy variable equal to one if the redeemed preferred stock resulted in complete extinguishment of preferred stock from the firm's capital structure; zero otherwise; EXTING 2 = same as EXTING~ but, in addition, in the case of partial preferred stock redemptions, the dummy is set to one if the remaining preferred stock issues have less restrictive covenants than the called preferred stock issue.

*Significant at the ten percent level **Significant at the five percent level ***Significant at the one percent level

The regression results are presented in Table 3. 9 In view o f the sample size, the standard regression results were supplemented with rank t ransformed regression results as suggested by Conover (1980). The coefficient on the C U M R E S variable

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has a significant positive sign, as predicted by the information signaling hypothesis. The coefficient on the EXTING 1 dummy variable is significant at the one percent level, indicating that complete redemptions are accompanied by significantly higher announcement returns compared to partial redemptions. This result is consistent with the interpretation that the market views the complete elimination of preferred stock from a firm's capital structure as a positive signal of the firm's future performance prospects. The EXTING~ dummy variable by itself explains 40 percent of the variation in announcement period excess returns.

In contrast, PROP is not statistically significant, thus not supporting either the free cash flow hypothesis or the Ross leverage signaling argument. Similarly, the coefficient on the EXTING 2 variable is not statistically significant indicating either that the burdensome covenants theory does not offer a valid explanation for common stock price reactions to preferred stock calls, or that the market is not sensitive to partial removals of covenants. 1~ Although there is no way of knowing if the covenants were binding (or expected to be binding) on the firms in the extinguishment sample, for these companies a call of the firm's outstanding preferred stock did eliminate a significant number of restrictions that might impact its future operating and financial flexibility. In the non-extinguishment subsample there is some evidence in Table 1 that the restrictive covenants were not as extensive as those in place for the extinguishment sub-sample and, in at least three cases, the covenants remaining after the preferred stock call were less restrictive than those in existence prior to the call. Thus, although one cannot totally reject the burdensome covenants explanation for the common stock price reaction to preferred stock calls, the evidence in support of the positive signaling hypothesis is more compelling. The results in Table 3 also indicate that the MM leverage hypothesis does not provide a complete explanation for the market reaction.

The two-day excess returns were also regressed against the interaction term, EXTING~*CUMRES, to study possible joint effects. This interaction term is significant at a five percent level, offering further support for the conclusion that the signaling hypothesis is valid for those cases where the call leads to a complete elimination of preferred stock from the firm's capital structure. Partial extinguishments of preferred stock do not appear to signal important information to investors.

In view of the differential results for the complete versus partial redemption samples, the announcement period returns study was replicated for the subsample of 10 firms that completely eliminated preferred stock from their balance sheet. The results of this study establish that significant positive announcement period returns exist in the total extinguishment sample. For these 10 firms, the preferred stock redeemed represented an average of 2.3 percent of the firm's total long-term capital. A listing of these firms along with other characteristics of the call is provided in Panel I of Table 1.

The two-day announcement period return of +2.15 percent for these 10 firms is significantly greater than the comparison period return at the one percent level. These results are confirmed by the non-parametric Wilcoxon signed ranks test and

21


by the market-adjusted and the single index market model procedures. Further, the results were found to be robust to alternate specifications of the estimation period, it

Conclusions and Impl ica t ions

For those firms where the preferred stock call resulted in the complete extinguishment of preferred stock from the capital structure, there was a significant, positive announcement effect. Overall, the analysis of the announcement period returns for the complete sample, the total extinguishment subsample, and the cross- sectional regressions support the positive signaling effect explanation of common stock price reactions to preferred stock calls. This result is consistent with the Firmerty (1986) tax effect argument and the Moyer, Chatfield and Marr (1987) financial distress argument.

These results are interesting because they suggest that the signaling effects of preferred stock redemption can be quite different from the exchange offer effects reported by Pinegar and Lease (1986). The results suggest, overall, that non-convertible preferred stock has a limited role to play in the financial structure of non-utility firms. Specifically, firms facing expected low marginal tax rates because of insufficient earnings or the presence of substantial tax shields may find preferred stock to be an advantageous form of financing, relative to alternative long-term financing sources. However, the use of preferred stock under these circumstances has been observed to provide a negative signal to the financial marketplace regarding the prospects of the firm. When preferred stock is removed from the financial structure of these firms, the market responds positively, resulting in significant positive stock price increases. Thus, one can expect the managers of firms that have experienced past earnings difficulties and have used non-convertible preferred stock financing to move quickly to remove that preferred stock from their capital structure as the firm's performance improves. Recent anecdotal evidence from firms such as Chrysler indicates that this occurs.

Finally, the effect of preferred stock calls may also be influenced by the agency costs associated with preferred stock relative to the agency costs of outside equity and debt. As progress is made in measuring these costs, new insights can be gained regarding the proper role of preferred stock in an optimal capital structure.

NOTES

1Smith (1986a and 1986b) argues that in the case of utilities, the new information revealed through a security offering is smaller because of regulatory disclosure requirements.

2plywood issued a convertible debenture one week before the preferred stock call. In addition, Ingersoll Rand announced a common stock repurchase two months after the call of the preferred stock. Neither of these firms was in the subset of firms in which the preferred call resulted in a complete extinguishment of the preferred stock in the capital structure.

3It is virtually impossible to identify whether short-term borrowings were increased with the objective of funding preferred redemptions. It was not possible to uncover any evidence of

22

The Effect o f Non-Convertible Preferred Stock Retirement on Shareholder Wealth

short-term financing of these preferred redemptions. Due to the long-term nature of preferred financing, it is unlikely that a company would replace it with short-term debt, unless the short-term debt was used as "bridge" financing.

4Although detailed results from the utility sample have not been provided, tests with utility calls Specifically, 56 utility preferred stock calls occurring between 1968 and 1985 were identified. Only 8 of these events had identifiable announcements in the Wall Street Journal and data on the CRSP tape. For these 8 events, no significant announcement period returns were found.

Yrhe Wall Street Journal Index was searched for any merger-related news in the two months surrounding the preferred stock call announcement.

6The primary problem with expanding the sample size is the lack of identifiable announcement dates in the financial press. Non-publicized announcements do not contain the information contained in a public announcement, nor is it likely that this information would be transmitted as systematically and quickly to the market, in comparison with an announcement appearing in the WSJ. To use return data based on non-publicized events could lead to misleading conclusions about the impact of such announcements, because the effects wilt be spread over a longer time period. Also, most of these non-announced calls were for very small amounts of outstanding preferred stock as a percent of total capitalization, thereby diminishing their value as a test of alternative capital structure change hypotheses. The relatively small sample size makes the conclusions suggestive, but not definitive. The concurrence of the conclusions with prior related research suggests that sample size has not been a major problem, however.

7The post announcementperiod was used in order to allow for the possibility that the expected return and risk may have changed as a result of the preferred stock call. To evaluate the robustness of the findings, tests were repeated for alternate comparison periods, including pre- and post-event periods. The alternate estimation periods used were t - 60 to t - 21; t - 60 to t - 11; t + 11 to t + 60; and t - 60 to t + 60 with a 10 (20) day window around the event date excluded. The results are not sensitive to the comparison period specification.

SThe statistical significance test used here also assumes the security returns are cross-sectionally independent. In the event there is cross-sectional dependence, a test statistic using standardized individual security returns may be employed. However, Brown and Warner (1985) in their extensive simulation tests show that the corrections for cross-sectional dependence may actually be harmful. Specifically, Brown and Warner (1985, 26) find that " �9 . tests which assume cross-sectional dependence are only about half as powerful and usually no better specified than those em~!oyed assuming independence. ~

9In addition to the simple regressions results reported in Table 3, multiple regressions were also run with CUMRES, PROP and EXTINGI as the independent variables. The multiple regression results indicated a positive and significant (2 percent level) relationship for EXTINGp Neither CUMRES nor PROP was significant in the multiple regressions. The R 2 was 0.42. The lack of significance for CUMRES in the multiple regression is most likely attributable to the fact the CUMRES and EXTING~ are both measures of positive signaling effects and to the small sample size. Multiple rank regression results were essentially the same as the multiple regression results.

1~ troublesome covenants are unlikely to be onerous in the case of investment grade issues such as those included in the Table 1 sample. Hence, the support that appears to be found for the burdensome covenants hypothesis is weak and should be interpreted with caution.

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Hit is possible that the results from the extinguishment sample are heavily influenced by the inclusion of Chrysler because of the large size of their preferred stock redemption (9.1% of total capital) compared to the mean of 1.7% for the total sample. Hence, the extinguishment analysis was also performed with Chrysler omitted from the sample. With Chrysler omitted, the mean return (significance level) for the combined day -1 and day 0 was 0.02133(1%). Therefore the results are not sensitive to the inclusion of Chrysler in the sample.

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The effect of non-convertible preferred stock retirement on shareholder wealth