An Analysis of Percs

Authors

Andrew H. Chen, Edwin L. Cox School of BusinessFollow
John Kensinger, Department of Finance, Insurance Real Estate and LawFollow
Hansong Pu, Massachusetts General HospitalFollow

Publication Date

10-25-1999

Abstract

This paper examines whether PERCS, Preferred Equity Redemption Cumulative Stocks, have been properly priced with respect to the equivalent packages consisting of longing the common stock and shorting the long-term call option. Test results indicate that PERCS have been overpriced in comparison to the equivalent packages composed of the relevant securities. Further tests on arbitrage restrictions show that transaction costs would prevent arbitrage profits. Investors find PERCS attractive because of the advantages in transaction costs and taxes which PERCS provide.

Document Type

Article

Disciplines

Finance

Source

SMU Cox School of Business Research Paper Series

Language

English