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

Despite accounting conservatism, equity book values greater than market values (BTM > 1) are not rare. The question we address is why. We find BTM > 1 is not only not rare, but also pervasive and persistent. More importantly, BTM > 1 is not attributable to potentially overstated equity book values, which calls into question BTM as a measure of conservative accounting for nearly 30% of firms. Rather, BTM > 1 is attributable to low equity market values, which partially stem from macroeconomic risk and other risk that is different 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 investor myopia in over-extrapolating weakening in a firm’s otherwise strong fundamental performance contributes to the low equity market values. Taken together, our findings reveal the BTM threshold of one has meaningful implications for accounting and finance.