The impact of calls of preferred stock on common shareholders' wealth

This paper examines the behavior of common stock prices around the announcement dates of calls of straight and convertible preferred stock. Our results indicate that calls of in-the-money convertibles result in a decrease in stock price. On the other hand, we find that calls of out-of-the-money convertibles are associated with stock price increases. In addition, our results indicate that the negative price impact of in-the-money calls is related to the reduction in cash dividend payout induced by the conversion of preferred stock to common stock, and not related to whether the call is underwritten or not, and the “moneyness” of the convertible preferred. Finally, we find that calls of straight preferred that are financed with debt result in an increase in stock price, while all other straight preferred calls have no impact on stock price.