Dutch Auction Rate Preferred Stock

Corporate cash managers have developed a number of equity-based strategies designed to utilize the partial tax exclusion for dividend income. A problem that has been common to all of these investment programs, to various degrees, is the need to protect invested principal. This paper examines a recent innovation in the area of corporate finance and cash management, dutch auction rate preferred stock (DARPS). Specifically, a sample of 201 dutch auction outcomes is empirically examined. The results demonstrate that DARPS issues provide a superior after-tax return relative to commercial paper and Treasury bills. Further, yields are shown to be set such that the tax benefits of the dividend exclusion are shared between the issuing and purchasing firms.