Century Bonds: Debt Or Equity Securities?
<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-style: normal; mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">In this study, we examine the characteristics of firms that have issued century bonds and the debt-versus-equity classification of these bonds.<span style="mso-spacerun: yes;"> </span>Although it is commonly assumed that such bonds are issued for tax-avoidance purpose, an examination of firm characteristics suggests that firms have non-tax related motives in issuing century bonds.<span style="mso-spacerun: yes;"> </span>The formal structure of century bonds also suggests that century bonds are similar to debt.<span style="mso-spacerun: yes;"> </span>On the other hand, our analysis of the systematic risk of issuing firm's equity shows that century bonds are more similar to equity than to debt.<span style="mso-spacerun: yes;"> </span>Thus, ultimately, the relative importance of these three factors will have to determine whether they are to be considered debt or equity.<span style="mso-spacerun: yes;"> </span></span></span></span></p>