Debt-Equity Hybrid Securities

Ellen Engel · Merle Erickson · Edward L. Maydew

225 citations0/0 files storedJournal of Accounting Research

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Corporate Finance and Governance Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting

Abstract

Trust preferred stock, first issued in 1993, was engineered to be treated as preferred stock for financial statement purposes and as debt for tax purposes (i.e., payments on trust preferred stock are deductible by the issuer). Our analyses exploit the features of trust preferred stock to shed light on three issues: 1) the extent to which firms incur costs to manage the balance sheet classification of a security; ii) the magnitude of tax benefits, if any, associated with leverage increasing capital structure decisions, and iii) the extent to which investor-level taxation inmposes implicit taxes on securities.

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1958The Cost of Capital, Corporation Finance and the Theory of Investment 1994Debt-covenant violations and managers' accounting responses 1974The effects of dividend yield and dividend policy on common stock prices and returns 1991Taxes and Business Strategy: A Planning Approach n.d.Debt and the marginal tax rate 1990Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks

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