What is it about?
The paper predicted in 1999 that the growth rates of technology companies was overstated. Once the executives of these companies would exercise their stock options, the blending of primary and diluted EPS would lower the estimated growth rates. Valuations would subsequently get adjusted (downwards) by the market. This happened over the 2000-2003 bear market. Keywords: earnings, dilution, stock options, EPS, FASB, 1997, IBES
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Why is it important?
The new EPS estimated will be 'unexpectedly' lower, due to dilutive effect of in the money options.
Perspectives
One year after the paper got published the NASDAQ crashed. There were many reasons, but one of them was the high valuations were not justified by the diluted EPS estimates the technology companies were producing.
Professor Pankaj Agrrawal
University of Maine
Read the Original
This page is a summary of: The Effects of Blending Primary and Diluted EPS Data, Financial Analysts Journal, March 1999, Taylor & Francis,
DOI: 10.2469/faj.v55.n2.2260.
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