Share Prices and Alternative Measures of Earnings Per Share

SFAS No. 128, Earnings Per Share, changes the way publicly held companies measure and report earnings per share. It is observed that the market values earnings as a meaningful measure of performance. This holds true for all 3 versions of earnings per share. While basic and primary earnings per share...

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Bibliographic Details
Published in:Accounting horizons 1998-09, Vol.12 (3), p.234
Main Authors: Balsam, Steven, Lipka, Roland
Format: Article
Language:English
Subjects:
Accounting
Accounting standards
Book value
Dilution
Earnings per share
FASB statements
SFAS 128
Statistical analysis
Stock prices
Valuation
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Summary:SFAS No. 128, Earnings Per Share, changes the way publicly held companies measure and report earnings per share. It is observed that the market values earnings as a meaningful measure of performance. This holds true for all 3 versions of earnings per share. While basic and primary earnings per share appear to be equally useful to investors, it is found that the fully diluted earnings per share measure is more informative than either of these 2 measures. Thus, reporting the effects of dilution appears to be relevant to investors. Results indicate that the alternative measures are incrementally informative to each other. Furthermore, the new reporting combination of basic and diluted earnings per share explains stock prices as well as the old combination of primary and fully diluted earnings per share. These results suggest that the FASB has achieved its goals of simplification and harmonization with no reduction in usefulness.
ISSN:0888-7993
1558-7975