The Effects of Accounting Principles Board Opinion No. 15 on Earnings Per Share: A Simulation Study.

Abstract This article focuses on the effects of Accounting Principles Board Opinion (APB) No. 15 on earnings per share. To date the few research studies con ducted on the effects of APB No. 15 are entirely concerned with an analysis of the validity of the two-thirds rule, a cutoff point established by the Board to deter- mine the number of common stock equivalents of convertible debt which are to be used in the calculation of primary earnings per share. The Opinion concluded that a convertible security should be considered a common stock equivalent at the time of issuance if, based on market price, it has a cash yield of less than 664 percent of then current bank prime interest rate. The time issuance is then defined as the date when agreement as to terms has been reached and announced. In addition to the firm's capital structure, information about all possible relationships between the prime rate and the cash yields on the three types of bonds is input in matrix forth. For our purpose this matrix is predetermined by three rows corresponding to straight debt, convertible debt and debt with warrants and eight columns corresponding to eight possible economic conditions which are described later.