PREFERRED STOCK AND TAXES.

This article looks at the development of a model, including both corporate and individual taxes, to determine the conditions under which preferred shares are issued and purchased in the U.S., Canada, Germany, Great Britain, France and Denmark prior to 1986. For each country examined, it is shown that there are conditions under which corporations are able to issue preferred shares that are profitable for the issuing corporations as well as attractive to investors. The model also produces specialized implications for each country. For example, the analysis suggests that there are stronger tax incentives to create a positive preferred stock equilibrium in Canada than in the U.S. This results from the existence of the dividend tax credit in Canada and from the higher dividend exclusion for corporate investors. The implication of the model for West Germany is that the ratio of new issues of preferred shares over bonds should be quite low because the condition for issuing preferred shares is only marginally satisfied. Individual investors and parent companies in France and Denmark are entitled to similar tax relief, but non-parent firms are in a less advantageous position than their Canadian counterparts.