Abstract ABSTRACT: This study employs the techniques of factor analysis and multiple discriminant analysis to study judicial decisions on the classification of debt versus equity in closely held corporations. Results of a test of stability over time indicate that this judicial decision process has evolved from an emphasis on the form of these types of transactions to a focus on the substance of the transactions. From a contemporary standpoint, four factors, "Creating in Substance a Debt Transaction," "Instrument Form and Provisions," "Financial Circumstances Surrounding the Security Issuance," and "Maintaining the Separation of the Interests of Shareholders and Holders of the Security in Question," were found to be significant predictors of this type of judicial decision. The resulting model accurately predicted 48 (96 percent) of the 50 cases used to develop the model and 27 (90 percent) of the 30 cases used to cross-validate the model.
Whittington et al. (Tue,) studied this question.