Dutch Auction Rate
Preferred Stock
Michael J. Alderson
Keith C. Brown
Scott L. Lummer
Financial Management 16, 1987, pp. 68-73
Corporate cash managers have developed a number of
equity-based strategies designed to utilize the partial tax exclusion for
dividend income. A problem that has been
common to all of these investment programs, to various degrees, is the need to
protect invested principal. This paper
examines a recent innovation in the area of corporate finance and cash
management, dutch auction rate preferred stock
(DARPS). Specifically, a sample of 201 dutch auction outcomes is empirically examined. The results demonstrate that DARPS issues
provide a superior after-tax return relative to commercial paper and Treasury
bills. Further, yields are shown to be
set such that the tax benefits of the dividend exclusion are shared between the
issuing and purchasing firms.
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