Abstract

As two important measures for firm performance, earnings-per-share(EPS) and diluted earnings-per-share(DEPS) are disclosed on the comprehensive income statement. Although the informativeness of EPS has been examined in various perspectives after Ball and Brown(1968) had published their prominent paper, the informativeness of DEPS has not been investigated sufficiently. HusonㆍScottㆍWier (2001) and CoreㆍGuayㆍKothari 2002) showed that the value-relevance of EPS is decreased with the dilutive effect of potential common stocks. In addition, Park(2009) showed that investors valuate lowly firm with dilutive effects. These prior studies imply that there exists the informativeness of potential common stocks’ dilutive effects. Therefore, compared with EPS, in which the dilutive effects of the potential common stocks is not reflected, DEPS is expected to be more value-relevant, because DEPS reflects the dilutive effects directly. In this perspective, the purpose of this study is to examine whether the value-relevance of DEPS is larger than that of EPS. To evidence the hypothesis, this paper analyze whether the explanatory power of DEPS is stronger than that of EPS, using both price-earnings model and returns-earnings model. The general result is that the explanatory power of DEPS is not likely to be consistently larger than that of EPS. In price-earnings model, the explanatory power of DEPS is higher than that of EPS for both the entire sample and yearly sample. However, in the case that, to control for the scale effect, all the variables are scaled with the beginning price, the explanatory power of DEPS is not significantly larger than that of EPS. In returns-earnings model, the explanatory power of the change in DEPS(ΔDEPS) is not significantly different from that of the change in EPS (ΔEPS). In addition, in various sensitivity analyses, the explanatory power of the change in DEPS(ΔDEPS) is not significantly different from that of the change in EPS(ΔEPS). The results of this paper is supposed to be driven from the following reasons. Firstly, the dilutive effects of the potential common stocks, which is shown as about 4%, is so small in this paper that the informativeness of DEPS can’t be discriminated from that of EPS. Secondly, because the current DEPS reflects only the dilutive effects of the potential common stocks, instead of their possibility of converging into the common stocks, DEPS is not likely to reflect the real economic effects related to their dilutive effects. Therefore, as far as this paper can’t reflect the possibility of DEPS’ converging into the common stocks, its results is not free from the bias.

Keywords

• diluted earnings－per－share
• diluted EPS
• earnings－per－share
• EPS
• explanatory power for stock price
• value relevance

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