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The Debt-Equity Distinction

Robert Flannigan

University of Saskatchewan

January 20, 2011

Banking and Finance Law Review, Vol. 26

The distinction between debt and equity often is crucially important. Yet some doubt that there is a distinction of kind, or that the distinction is certain. My objective is to illuminate the conventional view of the difference – the imparity between fixed and contingent participation – and address the main challenges it has encountered. I first describe the common law and statutory developments that crystallized the distinction. I then review the entangled criticisms: that debt and equity are functionally equivalent or that the difference between them is fatally uncertain. Finally, I briefly consider the utility of the distinction in specific contexts.

Number of Pages in PDF File: 22

Keywords: Debt, Equity, Debt-Equity, Finance, Finance Theory, Capital Structure Irrelevance Principle, Trade-Off Theory, Pecking Order, Free Cash Flow, Option, Tax, Factors, Functional Equivalence, Profit-Sharing, Debt-Equity Ratio, Contingency, Viability Risk, Default Risk, Insolvency Risk, Preference Share

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Date posted: January 21, 2011 ; Last revised: August 26, 2011

Suggested Citation

Flannigan, Robert, The Debt-Equity Distinction (January 20, 2011). Banking and Finance Law Review, Vol. 26. Available at SSRN: http://ssrn.com/abstract=1744140

Contact Information

Robert Flannigan (Contact Author)
University of Saskatchewan ( email )
15 Campus Drive
Saskatoon, Saskatchewan S7N 5A6
306-966-5876 (Phone)
306-966-5900 (Fax)
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