Market-book ratio

Market-book ratio

Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
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These measures include the quality of the information environment associated with Analyst Coverage (Mansi, Maxwell, and Miller, 2011), growth prospects that are difficult for investors to ascertain (measured alternatively by Market-Book Ratio and Sales Growth), and a stock bid-ask spread (BAS) estimate using the methodology of Corwin and Schultz (2012).
These include Stock BAS, financial measures (Market-Book Ratio, Sales Growth, Intangible Assets, Debt Ratio, Capital Expenditures, and Firm Size), and analyst opinion-based measures (Analyst forecast accuracy.
The former is a binary variable equal to one for issuers that have past growth in sales and Market-Book Ratio higher than their respective industry (SIC2) medians.
Market-Book ratio is market value of equity (compustat # 199 * compustat # 25) divided by the book value of equity (compustat # 60).
We also include Market-Book Ratio (the sum of the book value of debt plus the market value of equity plus the liquidating value of preferred stock, scaled by total assets) and Capital Expenditure (capital expenditures divided by total assets).
The mean (median) market-book ratio is 1.46% (1.16%) and the mean (median) capital expenditure to total assets is 6.3% (4.6%) across the sample period.
Following the model specification of Fang and Peress (2009), we include other control variables including logged board size, market-book ratio, stock unique risk and return, institutional equity percent, firm size (logged sales), analyst forecast dispersion and coverage, and unobservable characteristics related to industry.
Mean (t-stat) t-test p-value Question Sign-test p The firm with the higher market-book ratio will -2.12 probably earn higher stock returns over my (-6.20) typical investment horizon p < 0.001 p < 0.001 The firm with the higher market-book ratio is 2.50 probably a riskier investment (as part of a (8.75) well-diversified portfolio).
Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be de-listed, or receive a D rating.