Preferred shares have specific characteristics that distinguish them from both common equity and debt:
* Cross between Equity and Debt:Preferred shares have features of both equity and debt. They typically pay fixed dividends (similar to interest payments on debt) but do not have voting rights (similar to debt holders).
* Subordination to Debt:In the event of liquidation, preferred shareholders are paid after debt holders but before common shareholders.
* Perpetual or Long Maturities:Preferred shares can be perpetual, meaning they have no maturity date, or have long maturities, often exceeding those of typical corporate bonds.
* Incorrect Statement - Residual Claim:The incorrect statement is that preferred shares represent the residual interest in the corporation after all other liabilities have been paid. In reality, this is the characteristic of common equity. Preferred shares have a higher claim on assets than common shares but are subordinate to all forms of debt.