Stock Price Management and Share Issuance: Evidence from Equity Warrants

Mary E. Barth, Kurt H. Gee, Doron Israeli, Ron Kasznik

Research output: Contribution to journalArticlepeer-review


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. However, equity book values greater than market values (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. Specifically, we find the following. (i) Hedge returns based on BTM > 1 are higher than those based on BTM < 1. (ii) The Fama and French (1993) HML factor explains subsequent hedge returns based on BTM and BTM < 1 but does not explain such returns based on BTM > 1, whereas a modified HML based on BTM > 1 does. These findings suggest BTM > 1 reflects risk or mispricing different from BTM < 1. (iii) For BTM < 1, subsequent returns reflect mispricing, whereas for BTM > 1 they reflect macroeconomic risk. We also find evidence BTM > 1 reflects overstated equity book values. High BTM below one also reflects potentially overstated equity book values, but generates insignificant hedge returns. Together, our findings reveal that distinguishing BTM > 1 from other BTM levels identifies firms with different risk and accounting characteristics and call into question HML as a risk factor for BTM above one and BTM as a generic indicator of conservative accounting.
Original languageEnglish
JournalAccounting Review
Publication statusAccepted/In press - 2021


  • Warrants
  • Market timing
  • Expectations management
  • Share issuance

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