Effects of Preferred Stock Re-rating on Common Stock Prices: Further Evidence

This study examines the price reactions of common stocks to changes in preferred stock ratings, with focuses on firms with less information available in the market as well as on firms with a relatively larger proportion of preferred stock financing. Emphasis on differential information and the relative size of preferred stocks across firms provide a more powerful test of the effect of rating changes on stock prices. Contrary to previous studies that report no price effect on common stocks due to preferred stock re‐ratings, these results show that for low‐information firms and for firms with a larger proportion of preferred stocks in their capital structure, a preferred stock rating downgrade exerts significant negative price effect on common stocks during the two‐day announcement period. Our findings also have implications for future studies of other firm‐specific events such as security offerings, stock repurchases, and convertible calls.