Share Prices and Alternative Measures of Earnings Per Share
Posted: 3 Feb 1999
SFAS No. 128, Earnings Per Share, changes the way publicly held companies measure and report earnings per share. It replaces primary earnings per share with basic earnings per share and fully diluted earnings per share with diluted earnings per share. The FASB's objectives were (1) to respond to the criticism that computations were too complex and (2) to harmonize U.S. financial reports with international standards.
We observe that the market values earnings as a meaningful measure of performance. This holds for all three versions of earnings per share. While basic and primary earnings per share appear to be equally useful to investors, we find that the fully diluted earnings per share measure is more informative than either of these two measures. Thus, reporting the effects of dilution appears to be relevant to investors. Our results indicate that the alternative measures are incrementally informative to each other.
Furthermore, the new reporting combination of basic and diluted earnings per share explains stock prices as well as the old combination of primary and fully diluted earnings per share. These results suggest that the FASB has achieved its goals of simplification and harmonization with no reduction in usefulness.
JEL Classification: M41, G14, M45
Suggested Citation: Suggested Citation