Earnings Dilution and the Explanatory Power of Earnings for Returns

The Accounting Review Vol. 76, No. 4, October 2001

University of Alberta School of Business Research Paper No. 2013-210

Posted: 26 May 2013 Last revised: 30 May 2013

See all articles by Mark R. Huson

Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis

Thomas W. Scott

Independent

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems

Multiple version iconThere are 3 versions of this paper

Date Written: October 1, 2000

Abstract

Executive stock options and convertible securities can increase the number of common shares outstanding while adding less than the market value of the newly issued securities to a firm’s assets. We model the effect of expected dilution on the earnings/return relation. Expected dilution effectively reduces the permanence of an earnings innovation. Empirical evidence supports the hypothesis that dilutive securities attenuate the relation between earnings and returns. Estimated earnings response coefficients (ERCs) are significantly lower when there are shares reserved for conversion. The effect is more pronounced for firms that have experienced price increases or positive earnings news, as these increase the expected dilutive effect of conversions.

Keywords: stock options, dilution, earning, stock returns

Suggested Citation

Huson, Mark R. and Scott, Thomas W. and Wier, Heather A., Earnings Dilution and the Explanatory Power of Earnings for Returns (October 1, 2000). The Accounting Review Vol. 76, No. 4, October 2001; University of Alberta School of Business Research Paper No. 2013-210. Available at SSRN: https://ssrn.com/abstract=2269081

Mark R. Huson (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

4-20C Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2803 (Phone)
780-492-3325 (Fax)

Thomas W. Scott

Independent

No Address Available
United States

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3053 (Phone)
780-420-3325 (Fax)

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