Entity theory, modern capital structure theory, and the distinction between debt and equity.

Key Points

• This paper evaluates how the distinction between debt and equity influences investor choices and financial reporting.
• Assesses single and compound financial instruments to illustrate their roles in investment decisions.
• Explores the implications of entity theory on corporate capital structure and investor risk assessment.
• Demonstrates that misunderstanding the debt-equity distinction can lead to suboptimal investment decisions.
• Highlights that corporate capital structure significantly affects risk perception and expected returns.