Background
A preference share, often referred to as a preferred share, is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preference shares typically provide dividends that are paid out before any dividends are distributed to holders of common stock. However, these shares usually do not carry voting rights.
Historical Context
Preference shares have a long history dating back to the early days of corporations. They were introduced as a way to attract conservative investors looking for lower risk investment options compared to common shares. Over time, the structure and features of preference shares have evolved to meet the needs of different investors and corporate financing strategies.
Definitions and Concepts
Preference Share
A preference share is a type of share issued by a company that generally offers dividends and has a higher claim on the company’s assets and earnings than ordinary shares. However, holders of preference shares usually do not have voting rights in the company’s decisions.
Dividend Priority
Preference shares typically grant their holders the right to be paid dividends before ordinary shareholders receive any dividends. This priority makes them an attractive option for investors seeking stable income.
Preferred but Non-Voting
While preference shares carry financial advantages, unlike ordinary shares, they typically do not carry voting rights. As a result, holders of preference shares often cannot influence corporate governance through elections of the board of directors or other corporate matters.
Major Analytical Frameworks
Classical Economics
Classical economics does not directly focus on corporate financing instruments like preference shares, but their prioritization in dividend payments aligns with classical theories of interest and investment returns.
Neoclassical Economics
Neoclassical economics, which examines how individuals and firms optimize resource allocation, views preference shares as financial instruments that cater to different investor risk preferences.
Keynesian Economics
From a Keynesian perspective, preference shares can be seen as an effective way for companies to manage investment and financing, contributing to corporate stability and growth during different economic cycles.
Marxian Economics
Marxian economics might critique preference shares as another instrument for capital accumulation and concentration of wealth among capitalist investors, pushing economic disparities.
Institutional Economics
Institutional economics would examine preference shares through the lens of corporate governance policies and the regulatory frameworks that protect shareholders’ interests.
Behavioral Economics
Behavioral economics could explore how the features of preference shares (e.g., fixed dividends, lack of voting rights) appeal to investors’ risk aversion and preference for stable returns over potential higher gains.
Post-Keynesian Economics
Post-Keynesian economists might discuss preference shares in the context of corporate strategic behavior, investment financing, and shareholder relations, focusing on their stability aspect.
Austrian Economics
Austrian economics would look at preference shares as part of spontaneous market orders, focusing on how they serve specific investor needs and contribute to capital structure efficiency.
Development Economics
Development economics would explore how preference shares can be used by emerging markets and developing economies to attract investment without relinquishing control over corporate decision-making.
Monetarism
Monetarists could consider the role of preference share dividends in money supply within the economy, particularly their liquidity effects relative to common stock dividends.
Comparative Analysis
Comparing preference shares with ordinary shares, the primary distinctions are in rights and priorities. While ordinary shares usually come with voting rights and variable dividend payments, preference shares offer fixed dividends with higher priority but typically lack voting rights.
Case Studies
- Case Study of XYZ Corporation:
- Overview of their preference share issuance and its impact on their capital structure.
- Historical Analysis:
- Examination of how major corporations like Ford Motor Company have utilized preference shares during financial restructurings.
Suggested Books for Further Studies
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe.
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- “Investment Valuation” by Aswath Damodaran.
Related Terms with Definitions
- Ordinary Shares: These are common shares in a company that entitle the holder to dividends that may vary in amount and may even be missed if the company does not perform well, typically carrying voting rights.
- Dividend: A distribution of a portion of a company’s earnings, decided by the board of directors, to shareholders.
- Equity Financing: Raising capital through the sale of shares in a company.
- Corporate Governance: Mechanisms, processes, and relations by which corporations are controlled and directed.
- Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
