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The Pricing of Dutch Auction Rate Preferred Stock.

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Tony R. Wingler (Creator)
Daniel T. Winkler, Professor (Creator)
Institution
The University of North Carolina at Greensboro (UNCG )
Web Site: http://library.uncg.edu/

Abstract: The emergence of dutch auction rate preferred stock (DARPS) in 1984 created a new security which offers features to meet the needs of short-term corporate investors. The instrument offers attractive after-tax yields due to the preferential dividend income exclusion and an adjustable yield. In addition, DARPS are recognized as being safer than unhedged "dividend-capture plans." Dividend-capture plans, where dividend income is "captured" by trading into and out of high yield stocks, have recently become popular as a means of earning attractive returns on cash reserves. The Wall Street Journal (1987:6) notes, that during the October 1987 stock market ,..."corporateorate treasurers who had been earning as much as 10% after taxes on dividend captures — much more than from traditional short-term investments like treasury bills — faced big losses." This research investigates the pricing of DARPS and focuses on the instrument's distinctive features to develop and test a pricing model. This study of factors which influence the pricing of the instrument is believed to be the first of its type in the finance literature. This work complements previous research by Sorensen and Hawkins (1981) on the pricing of regular preferred stock, Winger et al (1986) on the investment performance of adjustable rate preferred stock, and Alderson et al (1987) on the investment performance of DARPS. Further, the prior research by Alderson, et al, is limited to the 201 dutch auctions held during the introductory period of the instrument in the first six months of 1986. This paper utilizes a sample over five times larger than Alderson, et al, spanning a 21/2 year period.

Additional Information

Publication
Southern Business Review, vol. 17, no. 1, Spring 1991, pp. 53-61
Language: English
Date: 1991
Keywords
Dutch auction rate preferred stock (DARPS),