Equityrepresents claims to shares in the net income and assets of a firm,and they do not have a maturity date. In terms of economic rights, equityclaims differ from debt instruments for several reasons. •First, firms are not contractually obliged to make periodic payments toequity holders: the payment of dividends is a discretionary decision ofthe firm.•Second, firms must pay all their debt holders before they make anypayment to equity holders: therefore equity holders are residualclaimants. As a result, equity claims are riskier than debt instruments. In addition toeconomic rights, equity claims confer ownership rights to equity holders.The presence of ownership rights is in contrast with bondholders, who haveno ownership interest but are rather creditors of the firm. Ownership rights have two main implications. •First, equity holders can benefit from any increase in the income orasset value of the company. In case of stock price increases (decreases)
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