Aswath Damodaran 308
Financing Choices
You are reading the Wall Street Journal and notice a tombstone ad for a company,
offering to sell convertible preferred stock. What would you hypothesize
about the health of the company issuing these securities?
# Nothing
# Healthier than the average firm
# In much more financial trouble than the average firm
I would expect the firm to be in much more financial trouble than the average
firm. Why else would it use convertible preferred stock when it could have used
an alternate source of financing?
The stock price response to the issue of securities seems to mirror this financing
hierarchy, with new bond issues eliciting more positive stock price responses
than new stock issues.
