Table 2, Panel B reports that the mean dividend yield on convertible exchangeable preferred stocks is 8.4% (median 8.0%) and the mean and median yield on convertible preferred stocks is 9.0%.
The convertible exchangeable preferred stocks have a mean call protection of 1070 days (median 1095 days).
This paper analyzes an innovation that has survived for over 15 years, convertible exchangeable preferred stock.
Convertible exchangeable preferred stock is a variant of convertible preferred stock that first appeared in 1982.
The second explanation, designated the adverse-selection hypothesis, states that some firms avoid issuing convertible exchangeable preferred stock to signal that they expect their common stock prices to rise rapidly, permitting them to force conversion early.
Also under the adverse-selection hypothesis, the common stock-price reaction to a convertible exchangeable preferred stock offering should be more negative than the reaction to a convertible preferred stock offering.
In this section, I discuss what is unique about convertible preferred stock as a capital-raising vehicle, then develop the hypotheses and their empirical implications about the motivation for issuing convertible exchangeable preferred stock versus conventional convertible preferred securities.
Convertible exchangeable preferred stock gives the issuer the option to obtain a tax shield when it can use it, by exchanging the preferred for debt with no underwriting costs.
The tax and transaction cost advantages should cause convertible exchangeable preferred stock to dominate convertible preferred stock as a means of raising capital.
Why would a firm offer convertible preferred stock instead of convertible exchangeable preferred stock? One potential explanation is that the firm has or can attract an investor clientele that seeks stable convertible preferred stock.(4) The firm can gain from serving the clientele if the investors are willing to pay a premium for convertible preferred stock that omits the exchange feature, or if being able to return to the clientele for future offerings reduces financing costs.
Stein does not consider convertible exchangeable preferred stock. Assume, however, that some medium-quality firms are better than others.
If convertible exchangeable preferred stock and convertible preferred stock are unequally close to voluntary conversion at issuance, investors' inferences about call policy can lead to different stock-price reactions across security types.