Preferred stock is a form of hybrid financing that has the qualities of both equity and debt. In terms of claims on assets and cash flows, preferred stock is senior to ordinary shares, but below bonds, and may have priority over ordinary shares when dividends are paid or the business is liquidated. They may also be convertible into ordinary shares. By their nature, they divert future cash flows away from shareholders, and so they must be removed from calculations of shareholder value, reducing the firm’s economic book value (EBV).