A Different Spin on Investing in Equity and Debt of the Same Firm : An Extension of Wibaut and Wilford (2009)

Wibaut and Wilford (Journal of Applied Finance, 2009) argue that owning both the equity and the debt of the same firm is suboptimal. Playing a different game, I argue that buying the debt and equity of the same firm may be an optimal strategy aimed at delevering the firms that have issued more debt than the investor wants. The objective of the investor in this paper is not to maximize the return, but rather to earn the same return as would be earned with zero debt by investing in equity