I don’t prescribe to the Efficient Market Hypothesis, but the market does tend to value a company efficiently in the long-run. With that said, there are two points when the price of a stock can change related to equity dilution; the first is when information becomes available that more stock is bound to be issued, and the second time is when the stock is actually issued.
Diluted earnings per share is commonly used to determine a firm’s price per share among other metrics. Warrants, options, and convertible bonds that are issued by a firm are accounted for in this number, and institutions in part take that information and use it to determine how much they are willing to pay per share shortly after it becomes available. A reduction in share price from information related to increased potential dilution, as reported in the quarterly report, is a demand driven price adjustment.
Separate of the first adjustment to price is the actual act of introducing the new shares that are sold on the float. This causes an increase in supply and thereby finds a new equilibrium with demand at a lower price, independent of previous valuation adjustment. This is to say, that it works much like short-selling inasmuch as the act puts downward pressure on the stock price. The increase can be a very slow process -over the course of months for options, and up to 15 years for warrants- and may be negated by positive circumstances. It can also occur very quickly and destroy shareholder value.
The rare case where dilution will not occur is when the company issues put options that they must settle with cash. In theory, such a transaction is supposed to have no effect on the price per share as the decrease in cash cancels out upward movement of price from decreased supply. Put options are rarely awarded to management as they incentivize poor performance.
Singling out callable contracts issued by a company with stock as the underlying asset, related gains, losses, and liabilities are non-existent. The only “cost” that I factor into valuing a company’s stock is the two-part economic cost of dilution to shareholders. The bottom line is to watch the diluted EPS in the quarterly report, and understand that it’s the flash before the bang.