A New Perspective on the International Evidence Concerning the Book-Price Effect
29 Pages Posted: 21 May 2016
Date Written: May 20, 2016
Finance theory implies equity returns should be positively related to financial leverage. However, Penman et al. (2007) decompose the book-price ratio into financing and operating components and report a negative association between financial leverage and returns. We shed new light on this puzzle by examining a region in which previous research has established that firms’ financial leverage choices are motivated by factors other than maximizing shareholders’ wealth: we hypothesize that this must be reflected in both how financial leverage is priced and the book-price ratio. We show that the relationship between equity returns and financial leverage for stocks in our sample is indeed very different to the findings of Penman et al. (2007), and this is reflected in the decomposed elements of the book-price ratio.
Keywords: Asset pricing, Eastern European stock markets, Emerging markets, EU enlargement, Transition economies
JEL Classification: G12, G32
Suggested Citation: Suggested Citation