dilutive

Dilutive is an adjective used in finance and accounting to describe securities or actions that could reduce the ownership stake or earnings per share of existing shareholders by increasing the number of outstanding shares. In corporate reporting, a security or transaction is considered dilutive if its exercise, conversion, or issuance would lower a per-share metric such as earnings per share (EPS). Conversely, anti-dilutive instruments would raise such metrics and are typically excluded from diluted calculations.

Common dilutive instruments include convertible bonds or notes, convertible preferred stock, stock options, warrants, and restricted stock units. When these instruments are exercised or converted, new shares enter the market, increasing the total number of shares outstanding and potentially diluting existing holders’ voting power and EPS.

Diluted earnings per share is a key concept used to measure the potential impact of dilutive securities. It adjusts the numerator (net income) and the denominator (weighted-average shares outstanding) to reflect the possible issuance of additional shares. The treasury stock method is often used for options and warrants, while the if-converted method is used for convertible debt or preferred stock. If the inclusion of these potential shares would lower EPS, they are considered dilutive; if they would raise EPS, they are anti-dilutive and are not included in the diluted EPS computation.

In practice, dilution affects ownership, voting power, and perceived value, influencing investor decisions and corporate financing strategies. Companies typically disclose both basic and diluted EPS to provide a clearer picture of potential dilution.