Earnings Per Share: An Empirical Test of the Market Parity and the Investment Value Methods.

Abstract The article presents the hypothesis that, both the Market Parity and the Investment Value method adequately discriminate between those convertible bonds that ultimately will convert from those that will not convert. When applying the Market Parity method in this study, the ratio of conversion value to market value of the bond was developed for four dates. The shorter period of two weeks and the longer period of two months were chosen for this study to provide a time period long enough so that the value of the bonds could be determined in the market. The offering price for the bond was used to determine the market parity ratio at, offering dates. The relative ranking of a given bond changed somewhat when computing the market parity ratio as of different dates. The first test is concerned with determining whether this variability in ranking was significant. The authors remark that, when implementing the Investment Value method, it is necessary to determine what the market value of the convertible security would be if the conversion option were not present.