Dilutive securities are those that are not common stock, but can be
converted to common stock, and once converted, they effectively
increase the number of shares outstanding, which decreases the
earnings per share. a Antidilutive securities are those stocks that are
converted to common stock and "retired, converted or affected
through certain corporate activities" either increasing the earnings
per share, or keeping them the same. a Shareholders tend to be
opposed to dilutive securities, because it creates new shares, thus
decreasing the value of their investment on existing shares. a This is
where dilusion protection kicks in. Additionally, the anti-dilusion
clause protects the shareholders from equity dilusion, as an effect of
stocks being sold at a lower price, potentially reducing the
shareholder's original investment (Kvilhaug, 2021). a
The main focus of the shareholder's would be to maintain their
current investment, at a minimum of the level in which they invested,
with potential to increase their investment. Increasing the number of
shares outstanding, thus decreasing the earnings per share would not
be in the best interest of an existing shareholder.
References:
Kvilhaug, S. (2021, September 13).
The differences between Dilutive
Securities and anti-dilutive securities
. Investopedia.
https://www.investopedia.com/ask/answers/102714/what-are-
differences-between-dilutive-securities-and-antidilutive-
securities.asp
