Hypotheses 1 and 2 predict that OMPS pre-tax yields are higher than equally risky NMPS pre-tax yields and lower than equally risky debt pre-tax yields.
Model (6) in Table 2, Panel A presents the results of multiple regression tests for differences in pre-tax yields of debt, OMPS, and NMPS.
The mean risk-adjusted pre-tax yields from Model (6) Panel A can be used to estimate the implicit taxes on OMPS and NMPS as follows:
This study examines the risk-adjusted pre-tax yields of OMPS, NMPS, and debt issued by the same public utilities for evidence of implicit taxes.
I find that the average pre-tax yield on OMPS is higher than that of other preferred stocks and lower than the average pre-tax yield on debt, after controlling for differences in voting rights and risk.
The yield advantage under the same pre-tax yields has dropped to 58 basis points under the revised tax law.
To demonstrate, recall that the pre-tax yields shown in Exhibit 1, which are representative of yields prevailing when auction rate preferred stock was introduced (August 1984), implied an after-tax yield advantage of 205 basis points.
Comparison of the Tax Advantage of Auction Rate Preferred Stock Relative to a Money Market Instrument Under Original and Revised Tax Laws Yield Auction Money Advantage Rate Market (basis points) Pre-tax yield 8.00% 10.0% 200 After-tax yield original tax laws 7.45%(a) 5.4%(b) 205 After-tax yield revised tax laws 7.18%(c) 6.6%(d) 58 Notes: The corporate tax rate under original tax laws is 46% versus 34% under the revised tax laws.