Equity Book Values Greater Than Market Values: Accounting, Risk, or Mispricing?

54 Pages Posted: 8 Jan 2019 Last revised: 25 Aug 2019

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Doron Israeli

IDC Herzliya - Arison School of Business

Suhas A. Sridharan

Emory University - Goizueta Business School

Date Written: August 23, 2019

Abstract

Despite accounting conservatism and indicating the firm’s required return exceeds its return on equity, equity book values greater than market values (BTM > 1) are not rare. The question we address is why. We find BTM > 1 is pervasive and persistent. More importantly, BTM > 1 is not attributable to overstated book values, which calls into question BTM as measuring conservative accounting for such firms. We find BTM > 1 is attributable to low equity market values, which partially stem from macroeconomic risk and other risk that differs for firms with BTM > 1. These findings call into question the use of Fama and French’s HML factor to reflect risk for firms with BTM > 1. Mispricing associated with investors over-extrapolating weakening in otherwise strong fundamentals contributes to the low equity market values. Together, our findings reveal the BTM threshold of one has meaningful implications for accounting and finance.

Keywords: Book-to-Market Ratios; Conservatism; Macroeconomic Risk; Extrapolation

JEL Classification: D84; G11; G14; M41

Suggested Citation

Barth, Mary E. and Israeli, Doron and Sridharan, Suhas A., Equity Book Values Greater Than Market Values: Accounting, Risk, or Mispricing? (August 23, 2019). Available at SSRN: https://ssrn.com/abstract=3306503 or http://dx.doi.org/10.2139/ssrn.3306503

Mary E. Barth

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Doron Israeli (Contact Author)

IDC Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
+972 9 952 7673 (Phone)

Suhas A. Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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