The use of preference shares by Maltese listed companies : a study

Abstract

PURPOSE: This study has three main objectives: to establish the extent to which preference shares have been used by Maltese Listed Companies (MLCs); to ascertain the main determinants and barriers to preference share issues in the local capital market; and to determine whether preference shares have a place in the capital structure of MLCs. DESIGN: A qualitatively-driven mixed-methods approach was adopted. Semi structured interviews were conducted with 27 participants comprising 23 MLC representatives, a Malta Stock Exchange (MSE) representative, two stockbrokers, and a Big Four financial advisor. An analysis of the financial distress of the local preference share issuers (PSIs) prior to their preference share issues was also conducted through the selection and computation of six ratios and the use of different quantitative approaches for each respective issuer. FINDINGS: Preference shares were issued by only two MLCs, and it was found that they are largely disregarded as a financial instrument, often being perceived as ‘a last resort’. It was found that preference shares are used for various purposes including to meet financing needs and support corporate growth; avoid dilution of control; exploit favourable market conditions; maintain a balanced capital structure; and enhance debt capacity. Furthermore, evidence was found in support of the financial distress theory, as the two PSIs showed some signs of being in financial distress prior to issuing preference shares. Conversely, the main barriers to preference share issues were deemed to result from the inherent limitations of the local capital market; preference shares’ lack of attractiveness to investors; their perceived complexity; and the lack of knowledge of this hybrid instrument. The study further indicated that many MLCs are willing to consider issuing preference shares in the future if current market conditions improve. Finally, enhanced education on preference shares was deemed necessary to encourage their issuance by MLCs. CONCLUSIONS: The study concludes that preference shares and their unique features are not yet sufficiently recognised and understood by MLCs. The characteristics of the local market; the complex nature of preference shares; and an apparent knowledge barrier, significantly hamper the widespread use of this means of financing. Therefore, such barriers need to be urgently addressed for preference shares to be secured a place in the financing structure of MLCs. IMPLICATIONS: This study is the first of its kind in Malta and attempts to foster a greater level of understanding and appreciation of preference shares, as well as their potentially valuable contribution to the local capital market. It also proposes various recommendations as to how preference share issues can be increased.