A New Perspective on the International Evidence Concerning the Book-Price Effect

29 Pages Posted: 21 May 2016

See all articles by James Foye

James Foye

University of Ljubljana

Dusan Mramor

University of Ljubljana - Faculty of Economics

Date Written: May 20, 2016

Abstract

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

Foye, James and Mramor, Dusan, A New Perspective on the International Evidence Concerning the Book-Price Effect (May 20, 2016). Available at SSRN: https://ssrn.com/abstract=2782441 or http://dx.doi.org/10.2139/ssrn.2782441

James Foye (Contact Author)

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

Dusan Mramor

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia
+386 1 589 2400 (Phone)
+386 1 589 2698 (Fax)

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