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Debt-Equity Hybrids

Posted: 28 Jul 1997  

Ellen Engel

University of Chicago Booth School of Business; University of Illinois at Chicago - College of Business Administration

Merle Erickson

University of Chicago - Booth School of Business

Edward L. Maydew

University of North Carolina at Chapel Hill

Date Written: May 1997

Abstract

This paper examines debt-equity hybrid securities whose existence and popularity appear to be due to their favorable accounting and tax treatment. Marketed under names such as Monthly Income Preferred Securities (MIPS), these securities are treated as equity-like for financial reporting and regulatory purposes, yet are treated as debt for tax purposes. In the four years since their creation, MIPS have largely replaced traditional preferred stock as a source of new capital, and many firms have engaged in recapitalizations in which MIPS are used to retire outstanding preferred stock or debt. We first describe how MIPS are structured to simultaneously achieve financial reporting, regulatory, and tax objectives. Second, we estimate the effects of actual MIPS issues, including how much firms appear to pay in the form of higher MIPS yields and issue costs for the financial reporting and regulatory advantages that MIPS have over debt, and how much firms save in taxes when using MIPS to retire preferred stock. Finally, we document how the market reacts to MIPS issue announcements, including separate analyses on firms that use MIPS proceeds to retire debt and preferred stock.

JEL Classification: G32, G39

Suggested Citation

Engel, Ellen and Erickson, Merle and Maydew, Edward L., Debt-Equity Hybrids (May 1997). Available at SSRN: https://ssrn.com/abstract=8440

Ellen Engel

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0966 (Phone)
866-377-52152 (Fax)

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States
312-413-3418 (Phone)

Merle Erickson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Edward L. Maydew (Contact Author)

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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