During my studies, all I hear is managers/directors try to avoid diluting eps. I do not see why this would be a problem as a simple stock split would dilute eps without having any effect on the operations

Similarly, an increase in eps as a result of share buyback is completely irrelevant in my view.

Is there any ground for the fear of diluting eps?

  • 2
    $\begingroup$ Many people have a mental model where the price of the stock is equal to K times EPS, where K is some kind of constant for a given type of firm. Obviously this is a rather simplistic model of stock valuation that leads to many fallacies and Finance courses explain why this is so (at least I hope they do). But an operating manager who does not handle finance probably does not take such a course. $\endgroup$ – noob2 Jan 30 '18 at 9:27
  • $\begingroup$ Accounting professor Stephen Penman calls this bias "functional fixedness" with respect to earnings. books.google.com/… $\endgroup$ – noob2 Jan 30 '18 at 19:23

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