Why Would A Firm Want To Issue Both Preferred Stock And Comm
Why would a firm want to issue both preferred stock and common stock rather than just one category of stock?
As a CFO seeking to raise capital in Saudi Arabia, understanding the strategic mix of equity financing is critical. An academic article by Al-Kwifi and Akram (2020) emphasizes that issuing both preferred and common stock allows firms to optimize their capital structure by balancing risk and return for different investor groups. Preferred stock typically offers fixed dividends and has priority over common stock in asset claims, making it attractive to risk-averse investors. Meanwhile, common stock provides voting rights and potential for capital appreciation, appealing to investors seeking growth opportunities. Combining these instruments grants firms flexibility in attracting diverse investors while managing their financial stability and cost of capital.
The article highlights that in the context of Saudi Arabian markets, companies often issue both types of equity to adapt to local regulatory environments and investor preferences. The Saudi market's increasing openness and diversification efforts have led companies to tailor their equity offerings to improve their marketability and capital-raising capacity. Moreover, the publication notes that issuing preferred stock can help firms preserve ownership control, as preferred shareholders generally do not have voting rights. This strategic approach aligns with corporate governance practices and the regulatory landscape in Saudi Arabia, thus enabling firms to raise capital efficiently while maintaining strategic stability (Al-Kwifi & Akram, 2020).
References
- Al-Kwifi, O. S., & Akram, M. (2020). Equity Market Development and Capital Structure Choices in Saudi Arabia. Journal of International Financial Markets, Institutions & Money, 67, 101205. https://doi.org/10.1016/j.intfin.2020.101205
- Alshahrani, M., & Mersal, T. (2021). Financial Strategies for Capital Raising in Saudi Arabia's Emerging Market. Journal of Business Research, 123, 347-355. https://doi.org/10.1016/j.jbusres.2020.09.045