Century Bonds: Debt Or Equity Securities?

Abstract

In this study, we examine the characteristics of firms that have issued century bonds and the debt-versus-equity classification of these bonds.  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.  The formal structure of century bonds also suggests that century bonds are similar to debt.  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.  Thus, ultimately, the relative importance of these three factors will have to determine whether they are to be considered debt or equity.