Securities that Do the Deal: The Decision to Issue Preference Shares by UK Firms

31 Pages Posted: 10 Jul 2002

See all articles by Sandra Laurent

Sandra Laurent

University of the West of England (UWE) - Bristol Business School

Abstract

This paper uses in-depth interviews with Finance Directors from UK firms that have recently issued preference shares. The study examines the particular circumstances that were taken into account into the decision to issue preference shares rather than the more common instruments of pure debt or pure equity.

The paper relates the findings from the interviews to three theories that have been suggested for the issuance of preference shares. These theories are Pecking Order, Taxation and Financial Distress.

Pecking Order is a general capital structure theory and the Taxation and Financial Distress theories have been developed from the general static trade off theory for capital structure. This paper examines whether "local" decision making for specific instruments can be related to global generalisations for capital structure theories. The comments from the interviews suggest that global capital structure theories for the use of pure debt and pure equity are no a major factor in the decision to issue preference shares.

Comments from the interviews suggest that Finance Directors regard financial planning principles to be of more importance in the decsion making process than capital structure principles. These considerations include future cash flows and the nature of the risk of the asset the funding is to be provided for.

However the interviews provide deeper insights into the decision making process in that in each case the decision to issue preference shares was an outcome of a "financial engineering" process. In all but one of the cases there was a close relationship between the issuers and investors and the needs of the investors was a major factor in determining the type of instrument to be issued. The investors exercised a level of control so that the type of instrument being issued was not one that the issuers felt comfortable with and would not, in other circumstances, have issued preference shares. Preference shares were issued as a necessity to "do the deal", even though they were felt, by the issuer, to have a number of disadvantages.

JEL Classification: G32

Suggested Citation

Laurent, Sandra, Securities that Do the Deal: The Decision to Issue Preference Shares by UK Firms. Available at SSRN: https://ssrn.com/abstract=301984

Sandra Laurent (Contact Author)

University of the West of England (UWE) - Bristol Business School ( email )

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