nc] is the after-tax return on NMPS to a corporate investor, [R.
This analysis suggests that the pre-tax return on OMPS must be higher than that of NMPS for a corporate investor to prefer investing in OMPS rather than NMPS.
In equilibrium, marginal investors determine prices and returns, therefore, the relation between the pre-tax returns on OMPS and NMPS depends on whether the marginal investor is a corporation.
H1: OMPS pre-tax dividend yields are higher than NMPS pre-tax dividend yields for public utilities having OMPS in their capital structures.
Thus, public utility managers may view outstanding OMPS as substitutes for NMPS in achieving the chosen level of total preferred stock financing (i.
If public utility managers are not motivated to achieve tax savings (because these savings are returned to ratepayers rather than accruing to common shareholders), then they will view OMPS and NMPS as substitutes in achieving the level of total preferred stock needed for "balance" in the public utility's capital structure.
Hypotheses 1 and 2 predict that OMPS pre-tax yields are higher than equally risky NMPS pre-tax yields and lower than equally risky debt pre-tax yields.
2] < 0) will indicate that NMPS pre-tax dividend yields are lower than those of bonds after controlling for differences in voting rights and risk.
However, if public utility managers view OMPS and NMPS as substitutes, then the relation between total preferred stock financing and OMPS is not expected to be significant ([a.
NMPS and the book values of each are determined from information provided in the Moody's Bond Record and the Moody's Public Utility Manual.
A majority of the OMPS and NMPS issued by the 73 public utilities that have OMPS in their capital structures did not have prices available at year-end 1997 and do not appear to be publicly traded.