Accounting regulators believe that undue emphasis is placed on earnings per share (EPS) and that this leads to simplistic interpretation of financial performance. Many chief executives believe that their share price does not reflect the value of their company and yet are preoccupied with earnings-based ratios. It appears that if chief executives shared the views of the regulators, then they may disclose more meaningful information than EPS to the market, which may then reduce the ‘reporting gap’ and lead to higher share valuations. The ‘reporting gap’ can be said to be the difference between the information required by the stock market in order to evaluate the performance of a company and the actual information disclosed.

Requirement Discuss the potential problems of placing undue emphasis on the EPS figure.