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

Mary E. Barth, Doron Israeli, Suhas A. Sridharan

Research output: Working paper


Equity book values should not exceed equity market values if a firm’s return on equity exceeds its cost of capital or it employs conservative accounting.  Yet, equity book-to-market ratios greater than one (BTM > 1) are pervasive and persistent.  We address whether BTM > 1 reflects low market values or high book values and, if so, why.  We find BTM > 1 reflects low equity market values associated with macroeconomic risk, and thus generates higher hedge returns than equity book-to-market ratios less than one (BTM < 1).  BTM > 1 also reflects potentially overstated equity book values.  BTM < 1 generates positive hedge returns but these returns likely reflect mispricing.  High BTM < 1 reflects potentially overstated equity book values but does not generate positive hedge returns.  Together, our findings reveal BTM > 1 identifies risk and accounting characteristics different from those of other BTM levels and call into question using a single BTM-based factor to predict returns for BTM >1, BTM as a generic indicator of conservative accounting, and BTM > 1 as the key indicator of overstated asset book values. 
Original languageEnglish
Number of pages55
Publication statusIn preparation - 2021


  • Book-to-market ratios
  • Conservatism
  • Macroeconomic risk
  • Extrapolation

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