Business, Management and Accounting
4 years ago

Dilutive securities weaken link between earnings and returns, impacting investor decisions.

The Accounting Review
Earnings Dilution and the Explanatory Power of Earnings for Returns
Mark R. Huson, Thomas W. Scott, Heather A. Wier

Paper Summary

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Executive stock options and convertible securities can dilute a company's earnings. This dilution weakens the link between earnings and stock returns. When companies have shares set aside for conversion, the relationship between earnings and returns is less strong. This effect is more noticeable for companies with rising stock prices or positive earnings news.