A type of dilution in which net present value (NPV) of shareholders’ wealth decreases. In other words, it is a direct reduction in the wealth of an entity’s shareholders due to changes in ownership structure (issuance of new shares or increasing the ownership base). The impact is economic in the sense that it goes beyond earnings per share and/ or control to cause a reduction in the net worth of shareholders.
Typically, economic dilution occurs upon issuance of new shares for a lower price than the price at which initial shares were issued. This will lead to a percentage dilution where the first batch of shares that had been issued will also have a lower value.
Other types of dilution include control dilution and accounting dilution (or EPS dilution).
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