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Title:Study of the Accounting Classification of Convertible Securities: A Market Analysis
Author(s):Beatty, Randolph Paul
Department / Program:Accountancy
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Business Administration, Accounting
Abstract:This research project develops and empirically tests standards of convertible security classification that are related to convertible security systematic risk. This work provides evidence concerning how accounting and interest rate risk measures relate to market risk measures of convertible securities. An alternative market-based classification scheme is compared to the traditional contractual form classification scheme. In addition to classification issues, this endeavor tests the appropriateness of the assumption of systematic risk stationarity for convertible securities.
Two sets of hypotheses are tested employing structural stationarity tests. The first set of hypotheses are concerned with the structural stationarity of the market model's parameters. Four ordering criteria: time; price; premium of price above bond value; and conversion value/call price are justified. Three tests of structural change are employed. Together, this leads to twelve separate tests of structural stationarity of the sample of convertible bonds and convertible preferred stocks. The second set of hypotheses addresses the issue of cross-sectional relationships between the accounting (and interest rate) risk measures and the systematic risk measure of convertible securities employing the Chow (1960) ANCOVA design. These later tests are concerned with the empirical differentiation between debt and equity.
From the results of Quandt (1958) and Chow (1960), structural stationarity of the linear process has been rejected in a substantial percentage of observations. This suggests that estimates of the systematic risk of convertible securities may be misspecified for linear models that assume a stationary process. On the other hand, the Farley, Hinich and McGuire (1970) test suggests that the hypothesized uniform probability of beta change was a misspecification of the model of the convertible security return generation process.
Selected accounting risk measures have been shown to be related to the upper quartile conversion value/call price partitioned convertible security's systematic risk estimate. On the other hand, the interest rate risk measures have been shown to be related to the lower quartile conversion value/cell price partitioned convertible security's systematic risk estimate. Thus, the level of the statistic conversion value/call price is indicative of the type of relationship observed.
Issue Date:1982
Description:153 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1982.
Other Identifier(s):(UMI)AAI8302802
Date Available in IDEALS:2014-12-16
Date Deposited:1982

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