dilution

(redirected from dilutive)
Also found in: Dictionary, Thesaurus, Medical, Legal, Encyclopedia.

Dilution

Diminution in the proportion of income to which each share is entitled. Issing new shares often causes dillution.

dilution

A decrease in the equity position of a share of stock because of the issuance of additional shares. Dilution is usually detrimental to the position of existing shareholders because it weakens their proportional claim on earnings and assets. See also potential dilution.

Dilution.

Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline.

This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of existing shares.

The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a selloff in the stock, lowering its price. That's one reason a company may choose to issue bonds rather than new stock to raise additional capital.

Similarly, if companies merge or one buys another, earnings may be diluted if they don't increase proportionately with the combined number of shares in the newly created company.

Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock.

Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.

dilution

  1. the decrease in control and EARNINGS PER SHARE experienced by existing shareholders in a JOINT-STOCK COMPANY when SHARE ISSUES are made which attract new shareholders. Dilution is a particular problem in fast-growing, family-controlled companies where the need to raise new capital may dilute the founding family's shareholdings to below 50%, causing them to lose potential control of the company.

    In the past, companies have sought to avoid dilution whilst continuing to raise capital by issuing NON-VOTING SHARES; but these are nowadays disapproved of by most STOCK MARKETS.

  2. the weakening of the monopoly of skills of a particular occupational group by the recruitment of less-skilled workers to perform the same work. See SKILL.
References in periodicals archive ?
Our results complement these other studies and make the following contributions to our understanding of the relations among earnings, valuation, and dilutive securities: First, we extend Ohlson's (1995) model and demonstrate analytically that rational investors should place less value on unexpected earnings when they anticipate dilution.
Our work also extends the earnings response coefficient (ERC) literature by documenting that dilutive securities significantly attenuate the relation between returns and earnings changes.
Our analysis indicates that dilutive securities attenuate the ERC even after we use diluted EPS in our regressions.
The dilutive effect of outstanding call options and warrants (and their equivalent) issued by the reporting entity should be reflected in diluted EPS by application of the treasury stock method in most instances.
Options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of options or warrants ("in the money").
Dilutive options or warrants that are issued, expire, or are cancelled during a period should be included in the denominator of diluted EPS for the period that they were outstanding.
In dealing with dilutive securities, the determination of common stock equivalency status for convertibles has two problems.
An additional problem concerns the date of exercisability of dilutive securities.
All dilutive securities would be included in the diluted EPS calculation, regardless of the time period of exercisability.
The method used to determine the dilutive effect of a convertible security.
On the other hand, the deal is dilutive to earnings, lowers tangible common equity temporarily, and reduces funding and business line diversity.
FOR EXAMPLE, THIS PRESS RELEASE STATES THAT HRPT'S SALES OF ITS HPT AND SNH SHARES ARE EXPECTED TO BE DILUTIVE TO HRPT'S NET INCOME BY LESS THAN $0.