During the 1980s, the proportion of business assets financed by debt exceeded that of any other period since World War II. The characteristics of financial securities also changed, as junk bonds, variants of preferred stock, warrants, and other forms of mezzanine financing became more common in credit markets and in private loan contracts. Furthermore, the potential risks and returns offered by all securities have been altered as otherwise familiar financial instruments increasingly contain novel options.
These innovations have challenged the traditional financial and legal distinctions between debt and equity. To examine the changes in business financing, their causes and the implications for public policy, the Federal Reserve Bank of Boston in the fall of 1989 sponsored a conference of academics, lawyers, investment bankers, economists, and government officials. This article offers an overview of the conference papers and the discussants’ remarks.