Book-to-Market Ratio

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Book-to-Market Ratio

A ratio of a publicly-traded company's book value to its market value. That is, the BTM is a comparison of a company's net asset value per share to its share price. This is a useful tool to help determine how the market prices a company relative to its actual worth. A ratio greater than one indicates an undervalued company, while a ratio less than one means a company is overvalued. Value managers seek out companies with high BTMs for their portfolios.

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In additional tests, we find that the spread volatility premium is largest in stocks with the smallest market capitalization and the highest book-to-market ratios.

The volatility of bid-ask spreads

Fama and French (1998) conducted a study on the returns yielded by high book-to-market ratios and low book-to-market ratios.

Pairs trading and value investing strategies

In any event, assuming these two value approaches imply very different portfolios, the Research Affiliates paper tests a Eugene Portfolio that is long risky stocks and short safe stocks, but which is indifferent to book-to-market ratios.

Shiller vs. Fama: Which Nobel Winner Comes Out on Top?

5) The earnings-to-price and the book-to-market ratios have an induced positive correlation due to the denominator of each measure being a positive function of the share price.

PEG investing strategy: a revisit

Higher book-to-market ratios (undervalued firms) and higher variations in returns (riskier firms) appear to lead to larger increases in short interest.

Do short sellers anticipate large stock price changes?

We find that pro forma announcers tend to be relatively "young" firms that are concentrated primarily in the tech sector and business services industries, and that they are significantly less profitable, more liquid, and have higher debt levels, P-E ratios, and book-to-market ratios than other firms in their own industries.

Empirical evidence on recent trends in pro forma reporting

Beaver and Ryan (2000) argue that variation in book-to-market ratios is a function of two components: biased accounting recognition and lagged accounting recognition.

The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing debt costs

Then, within each size quartile, firms are sorted evenly into quartiles based on their book-to-market ratios.

The effects of investor informativeness and earnings persistence on the Japanese subsidiary earnings anomaly

First, we subdivide the sample into groups based on: 1) their book-to-market ratios (B/MV), 2) the level of Tobin's Q, and 3) their magnitudes of free cash flow.

Free Cash Flow And Long-Run Firm Value: Evidence From The Value Line Investment Survey [*]

The authors also show that glamour winners -- positive surprise firms with a sequence of past positive earnings surprises, higher past trading volume, and low book-to-market ratios -- exhibit faster price reversals.

Behavioral Finance

Can one use insider trading data along with information on P/E ratios, book-to-market ratios, momentum, or dividend yields to improve investment results?