Topic:  The Effect of Dilution from Convertible Securities on the Price-Earnings Ratio: Theory and Empirical Evidence

Presenter：Zeyun (Jeff) Chen， Ph.D. student in Accounting, University of Houston

Time:     May 16, 2007（Wednesday）3：00—4：30 PM    

Venue:    Room 513, Jiageng Bld 2

Chair：  Yujun Wu, assistant professor in finance, IFAS

Abstract:

Drawing on the Modigliani-Miller theorem and the options pricing model, we develop a model relating the dilution effect of convertible securities to the price-earnings ratio that offers explanations for cross-sectional variation in price-earnings ratios. The key feature of the model is that the call options embedded in convertible securities have the potential to transfer firm value from common equity to convertible securities holders conditional on certain firm-specific characteristics. Our model predicts that the (negative) effect on the price-earnings ratio of dilution from convertible securities is increasing in earnings, firm value, and volatility of firm value. The results of our empirical analysis are consistent with these predictions.

Presenter Introduction：

Zeyun (Jeff) Chen is a Ph.D. student in Accounting at University of Houston. He got his MBA and BBA degrees in University of Louisiana at Lafayette and Fudan University respectively. He is a member of American Accounting Association.

Paper:  The Effect of Dilution