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Callable Preferred Stock – Definition

Callable Preferred Stock Definition

Callable Preferred Stock, also referred to as “re-purchasable preferred shares,” or “redeemable stock” or is a type of preferred stock that can be redeemed or repurchased by the issuing company. The issuing company can repurchase the shares at a specified price for a defined period after the issuing of the stock or in the event of occurrence of a particular condition.

A Little More on What is Callable Preferred Stock

Callable or redeemable stock are mostly issued by the companies in the in the developed countries such as the United Kingdom, united states among others. The main feature of this kind of stock is that the company issuing shares has the right to buy back its shares at a given price after some durations based on the agreed conditions.

However, besides most preferred stock being redeemable, the redemption of most classes of the preferred stock is based on the stock redemption clause that set the minimum period, the redemption method, the redemption price, and the purpose of the redemption.

Redemption of stock occurs in three main ways:

  • Premium redemption: under premium redemption, the compensation amount is added to the par value of the preferred shares for redemption.
  • Fund compensation: under this method, the issuing company sets the compensation amount from operations or dividends to pay for the redeemed shares.
  • Conversion redemption: under this method, the issuing company converts preferred shares to ordinary shares.

Similarly, there are two types of redeemable priority shares which are mandatory and arbitrary redemption.

  • Mandatory redemption – occurs when the issuing company has the obligation to repurchase shares from the shareholders. The shareholders also have the obligation to sell the shares back to the company
  • Arbitrary redemption – this occurs when the shareholder has an option to decide whether to sell back the shares to the company or not based on the agreement by the issuing company.

In most cases, the redeemable shares fall in the first category. This means that the redemption choice lies in the hand of the redeeming company.

References for Redeemable Preferred Shares




Academic Research on Callable Preferred Stock

  • The retirement of Non‐callable Preferred Stock, Stevenson, R. A. (1970). The Journal of Finance, 25(5), 1143-1152. This paper presents research conducted in the recent years concerning the company stock reacquisition. The paper discusses the retirement of the preferred shares in the provision to make them non-callable by the company. According to the author, despite the non-callable feature of common stock, the companies in the recent period find it impossible to completely remove these features the preferred stock from their capital structure
  • Impact of the TARP financing choice on existing preferred stock, Kim, D. H., & Stock, D. (2012). Journal of Corporate Finance, 18(5), 1121-1142. The October 14, 2008 TARP. Immediately after the introduction of TARP, small backs in the US were forced to issue TARP preferred stocks when they get approval from the insurance. This paper investigates the impacts of TARP preferred issuance upon preferred stock, bonds, and common stock. Particularly the paper focused on two different types of outstanding stock which include: trust preferred stock and non-trust preferred stock.  The author presents that the trust preferred stock is more superior than preferred stock, and the non-trust preferred stock has the same claim as the preferred stock. The paper also presents competing theories for expecting that trust preferred should enjoy greater or lesser returns relative to non-trust.
  • On the Pricing of Preferred Stock, Sorensen, E. H., & Hawkins, C. A. (1981). Journal of Financial and Quantitative Analysis, 16(4), 515-528. This paper explores the pricing of preferred stock in the stock market.  The author presents that historically, preferred stock ranks well below bond issues and common stock as a source of financing in the private capital market. The author also presents that the issuance of preferred burdens the issuer more compared to issuance of bonds since the preferred stock has fixed financing cost that does not have tax deductible expense to the user.
  • Accounting for redeemable preferred stock: Unresolved issues, Nair, R. D., Rittenberg, L. E., & Weygandt, J. J. (1990). Accounting Horizons, 4(2), 33. This paper discusses the accounting models for redeemable preferred stock. The author explains the accounting issues that influence the computation of the preferred stock. The paper explains that some accounting policies used in the valuation of preferred stock lack conformity and therefore influence the computation of the preferred stock.
  • FINANCING WITH CONVERTIBLE PREFERRED STOCK, 1960–1967, Pinches, G. E. (1970). The Journal of Finance, 25(1), 53-63. Over the recent years, the use of convertible preferred stock has increased considerably in the companies.  This paper explores the valuation of convertible security in the company. The paper also presents the usage of convertible preferred stock and their characteristics.
  • THE ANNOUNCEMENT EFFECTS OF PREFERRED STOCK RE‐RATINGS, Davidson III, W. N., & Glascock, J. L. (1985). Journal of Financial Research, 8(4), 317-325. This paper explores the behavior of firms that have their ratings on preferred stock changed by standard about equity return. The study indicates that the market forecast that the re-rating of the preferred stock is likely to occur in the future. Nonetheless, the downgrading of the utility is not affected by the rerating.
  • A simple approximation of the value of callable convertible preferred stock, Ramanlal, P., Mann, S. V., & Moore, W. T. (1996). Financial Management, 74-85. This paper investigates the approximation of the model used for callable convertible preferred stock that enables cash dividends and deferred callability on the issuing company`s common stock. Then paper also depicts that model prices predict market prices with reasonable accuracy.
  • Rational timing of calls of convertible preferred stocks, Byrd, A. K., Mann, S. V., Moore, W. T., & Ramanlal, P. (1998). Journal of Financial Research, 21(3), 293-313. This paper focuses on determining the rationality timing purchase and resale of the preferred stock in the stock market. The author presents that most of the preferred stock issued indicates nonpositive average option in the short run. Therefore, the wealth transfer opportunity does not exist for immediate call.  However, contrarily, the interpretation of this means over a long period the callability of the bonds has substantial delays in calling convertible preferred shares.
  • Innovation in preferred stock: Current developments and implications for financial reporting, Frischmann, P. J., Kimmel, P. D., & Warfield, T. D. (1999). Accounting Horizons, 13(3), 201-218. This study investigates the considerable innovations occurred in issued preferred stock securities between 1993 to 1996. The study records the trends in the use of preferred stock which shows that introduction of variant preferred stock is known as trust preferred securities (TPS) considerably change the landscape of the reporting securities by the company.
  • Determinants of capital structure, Thies, C. F., & Klock, M. S. (1992). Review of Financial Economics, 1(2), 40-52. Capital structure is one of the important components of finance in a company. As such this article explores and discusses the factors that determines the capital structure in the company. The paper also presents the theoretical view of the determinants of the capital structure of a company in the stock exchange market.
  • Variation in attributes of redeemable preferred stock: Implications for accounting standards, Kimmel, P., & Warfield, T. D. (1993). Accounting Horizons, 7(2), 30. This paper explores the variations in the redeemable preferred stock that are attributed to different accounting policies and standards. The study presents the variations in the accounting models that have led to the variations in preferred stock. According to the author, besides presenting the basis for calculation of the preferred, stock, accounting standards and policies also presents implications to the valuation of the preferred stock.
  • Recent Developments in Preferred Stock Financing, Fergusson, D. A. (1952). The Journal of Finance, 7(3), 447-462. For decades, there has been growing importance of issuing od stocks among the companies especially public security offering of companies. As such this paper investigates the recent developments in preferred stock funding.
  • Convertible calls and security returns, Mikkelson, W. H. (1981). Journal of Financial Economics, 9(3), 237-264. The study explores the implications of the convertible security calls on the wealth of security holder. The study presents that the values of the common stock fall slightly during the announcement of the convertible debt calls. However, the wealth of the common stockholders is not affected by convertible preferred stock calls. The findings of this study were consistent with a corporate tax effect.

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