The Debt-Equity Distinction
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
Date posted: January 21, 2011 ; Last revised: August 26, 2011