The Difference Between Preferred & Common Stocks in Europe from the Market Perspective

• Main Authors: Tomas Brabenec, Frantisek Poborsky, Sean Patrick Saßmannshausen
• Format: Article
• Language: English
• Published: Tomas Bata University in Zlín 2020-09-01
• Series: Journal of Competitiveness
• Subjects: preferred stocks; common stocks; beta coefficient; stock valuation; competitiveness
• Online Access: https://www.cjournal.cz/index.php?hid=clanek&bid=archiv&cid=375&cp=

Companies listed on the stock market must devote a great deal of attention to their market position. They must increase their competitive advantage in the undeniably key process of the issuance of stocks. As the issuance of preferred stocks has increased after the last crisis and in the current period of low interest rates in Europe, they are becoming more favoured investment instruments, we decided to analyse the real properties of preferred stocks in Europe in order to increase the efficiency of joint-stock companies. Using a dataset comprising all companies having both common and preferred stocks issued and traded on European markets between 2009- 2016, we determined the relationship of risk (measured by beta coefficients) and price volatility among common and preferred stocks and bonds in Europe. Our findings show beta coefficients of preferred stocks as systematically lower than beta coefficients of common stocks. Considering a difference of up to 10% as negligible, however, preferred stocks showed a similar or higher beta coefficient than corresponding common stocks of the same company in 53% of cases, whereas for 33% of cases, the difference is only ±10%. Coefficients of variation in prices showed a similar relationship, with only a negligible portion of preferred stocks bearing fixed (stable) dividends. This result implies that currently traded preferred stocks in Europe in fact do not possess such characteristics they are typically said to have, and in many cases they incur as comparable a risk as do common stocks. This essential information should help to increase the efficiency and competitiveness of joint-stock companies.