Preferred Stock – Debt or Equity?

There has been previous research on the subject of preferred stock and its classification as debt or equity. This thesis adds to the discussion by incorporating a comprehensive measure for financial standing. In this thesis, preferred stock returns of 74 companies are regressed on the returns of bond and common equity and a measure of default probability. The result of the study is that the majority of preferred stock in the sample is debt-like, albeit with significant equity components. There is also a clear tendency of preferred stock issued by companies with poor financial standing to be equity-like and vice versa. From these results it is concluded that there is room to criticize the current classification of preferred stock as equity