Antidilutive Effect

In investment, the term antidilutive effect denotes the result of an action which increases a company’s earnings per share (EPS) ratio. This effect is often accomplished by a share buy back.

When a company issues new shares and sells them to investors through public offerings after it has made its initial public offering, the number of shares in circulation increases. The increase in supply can drive down demand for shares, leading to a decline in the values of individual shares. This is known as stock dilution. The value of the company’s full stock has not changed, but the market value of each share has because there are more shares to go around. Because shareholders generally expect companies to pay out dividends, a higher number of shares may mean higher cash outflows. An increase in shares may also lead to a decrease in the dividends paid out on each share because profit distributions must be divided between more shares.

Using antidilutive measures – primarily stock buy backs – companies can encourage demand for their shares by reducing the supply of available shares. These measures may also enable them to pay out higher dividends per share, making their shares more attractive to shareholders and encouraging shareholders to hold their shares. Companies may also reduce outflows of capital because less shares in circulation means less dividends to distribute. Reducing the number of shares in circulation also reduces the chance of too many shares falling into the hands of a competitor, which could result in a hostile takeover.

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