Asian Review of Financial Research Vol.18 No.2 pp.263-287
Discount Pricing of Preferred Stocks to Common Stocks：The Role of Liquidity Premiums
Key Words : 무의결권우선주,의결권 가치,유동성 프리미엄,가격비율,거래비용
Existing studies focus on differential voting rights as they attempt to explain the discount pricing of preferred (non-voting) stocks compared to common (voting) stocks in the Korean market. In this study, we take into account liquidity differentials as well as voting right differentials in explaining cross-sectional variation of relative prices of preferred stocks. Based on the data from 1990 to 2003, we find that liquidity differentials appear to be an important determinant of price differentials between common and preferred stocks. During our sample period, the size of outstanding preferred stocks relative to that of common stocks has been decreasing, since Korean firms tend to shy away from financing through preferred stocks. This trend has helped deteriorate the liquidity of preferred stocks relative to common stocks, resulting in increased trading costs for preferred stocks. Our results are consistent with the view that the discount pricing of preferred stocks reflects increased required rates of return to compensate for the relative lack of liquidity associated with preferred stocks.