Dilution

Dilution is not automatically bad: raising capital at a price above intrinsic value and deploying it at a return above the cost of capital leaves existing shareholders better off despite owning a smaller fraction. It is destructive when shares are issued cheaply, or when the proceeds earn less than the cost of capital — which is why serial equity raisers with mediocre returns steadily erode shareholder value. Employee stock options dilute gradually and invisibly, which is why diluted EPS rather than basic EPS is the honest figure. A rights issue is the structure that lets existing holders avoid dilution by participating.