On the pricing of non-convertible preferred stock offerings

Sammanfattning: Existing research encompassing pricing of preferred stock offerings is limited and it seems as if researchers have ignored to investigate it. As such, and given the recent years' momentum in the Canadian preferred stock market, in this study we examine the pricing of non-convertible preferred stock issues by assessing initial returns of 266 seasoned offerings on the Toronto Stock Exchange over the period 2002-2016. We find significant evidence of new preferred stock issues being overpriced, yielding negative first-day excess returns of 0.60%. This overpricing is strongly tied to illiquidity discounts in the aftermarket. We also find that increased interest rate uncertainty at the time of the issue renders in more overpricing, demonstrating increased difficulty in assessing the preferred stock's true value. No significant support for overpricing being a result of underwriter competition is evident. Finally, we find that new offerings made by firms that recently have issued preferred stock are priced more accurately. This is suggested to be a result of investors having a recent firm-specific issue available acting as reference upon evaluating the new issue.