9.32 : Types of Dilution: Value

Value dilution occurs when a company's per-share value decreases due to the issuance of additional shares without a corresponding increase in the company’s profits, assets, or market value. This often affects existing shareholders by reducing their share of the company’s earnings and ownership.

The leading causes of value dilution include raising capital through new stock issuance, granting stock options to employees, and converting convertible securities into shares. While these activities may support a company’s growth, they can harm shareholder value if not balanced by adequate growth or profit generation.

A key indicator of value dilution is the decline in earnings per share (EPS), which shows that profits are being spread across more shares. This reduction can make the company’s stock less appealing to investors. Additionally, when new shares are issued, existing shareholders may lose some ownership and voting rights, weakening their influence in corporate decisions.

To protect shareholder value, companies should carefully manage share issuance and focus on creating long-term growth that offsets the effects of dilution. Investors should monitor the company’s financial statements and dilution metrics to make informed decisions and protect their investments.