Raising Capital Using Monthly Income Preferred Stock: Market Reaction and Implications for Capital Structure Theory

Abstract

Monthly Income preferred stock (MIPS) was developed by Goldman Sachs in 1993. It is structured so that the preferred dividends are tax deductible even though the rating services consider the security to be preferred equity. We find that MIPS users have S & P ratings that are generally at or just above the minimum investment-grade level. Issuers also tend to be more heavily leveraged and have inferior liquidity ratios than comparable firms. When proceeds are used to retire either long-term debt or preferred stock, the common stocks' two-day abnormal return is negligible. In contrast, when proceeds are used to repay bank loans, the two-day response is significantly negative. This result is consistent with the notion that banks perform a valuable monitoring function which, if removed, lowers shareholder wealth.

JEL Classification: G31, G35, G24, G12, G14