Abstract:

Preferred stocks are used both to raise funds for investment projects and lock-in control in the company. On the one hand, the founder is able to retain control in a company using preferred stocks to select better investments projects, on the other hand he is able to finance ones with newly issued preferred stocks i.e. preferred stocks should be treated as instruments for sustainable development of a company.

However, conflicts of interests may occur between common shareholders and preferred stock owners.  Accurate valuation of common and preferred stock can resolve the agency conflicts, improve financial stability of a company in the market and overcome financial crisis in the business.

The paper studies the determinants of the price difference between voting common shares and nonvoting preferred shares in the four largest preferred stock markets: Brazil, Germany, Russia and South Korea. In these countries, preferred shares are treated as equity type securities and dual-class share structure with preferred shares as inferior equity class is widely used. The paper presents determinants of the dual-class premium across the markets: control contest, inferior liquidity of preferred shares, corporate governance, company ownership structure and value of shareholder voting rights provided by each stock class estimated through option prices technique.