A comparison of taxable and tax-deductible preferred yields

Abstract

This research investigates yield spreads between traditional preferred and a new type of tax-deductible preferred that is essentially a form of debt upon which the issuer has some rights to defer payments. Risk-adjusted pretax yields on the tax-deductible preferred are empirically found to be only slightly higher than those on traditional preferred, and only for highgrade or liquid issues, while they are discovered to be insignificantly different from those on bonds. The results imply that large after-tax yield advantages exist for corporate investors to hold traditional preferred and for corporate issuers to finance with the tax-deductible preferred if they can afford the greater liquidity and bankruptcy risk, respectively.

Citation

Murphy, A. (2001), "A comparison of taxable and tax-deductible preferred yields", Research in Finance (Research in Finance, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 169-193. https://doi.org/10.1016/S0196-3821(01)18007-X