Advanced Search
MyIDEAS: Login to save this article or follow this journal

The Book-to-Price Effect in Stock Returns: Accounting for Leverage


Author Info

Registered author(s):


    ABSTRACT This paper lays out a decomposition of book-to-price (B/P) that derives from the accounting for book value and that articulates precisely how B/P "absorbs" leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is "negatively" associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors-including the book-to-price factor-albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 45 (2007)
    Issue (Month): 2 (05)
    Pages: 427-467

    as in new window
    Handle: RePEc:bla:joares:v:45:y:2007:i:2:p:427-467

    Contact details of provider:
    Web page:

    Order Information:

    Related research



    No references listed on IDEAS
    You can help add them by filling out this form.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Anginer, Deniz & Yildizhan, Celim, 2010. "Is there a distress risk anomaly ? pricing of systematic default risk in the cross section of equity returns," Policy Research Working Paper Series 5319, The World Bank.
    2. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 410-454, December.
    3. George, Thomas J. & Hwang, Chuan-Yang, 2010. "A resolution of the distress risk and leverage puzzles in the cross section of stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(1), pages 56-79, April.
    4. Panayiotis Artikis & Georgia Nifora, 2012. "Capital Structure, Macroeconomic Variables & Stock Returns. Evidence from Greece," International Advances in Economic Research, Springer, Springer, vol. 18(1), pages 87-101, February.
    5. Tarek S. Zaher, 2010. "Performance of debt free firms," Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 36(6), pages 491-501, June.
    6. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(3), pages 391-402, June.
    7. Panayotis Artikis & Georgia Nifora, 2011. "Leverage and Returns in Three Countries of Southern European Region," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 3-26.
    8. Tarek Zaher, 2009. "Performance of Debt Free Firms," NFI Working Papers 2009-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    9. Ulrike Malmendier & Enrico Moretti & Florian S. Peters, 2012. "Winning by Losing: Evidence on the Long-Run Effects of Mergers," NBER Working Papers 18024, National Bureau of Economic Research, Inc.
    10. Tarek Zaher, 2011. "Does It Pay to Invest in Debt Free Firms During Recessions?," NFI Working Papers 2011-WP-22, Indiana State University, Scott College of Business, Networks Financial Institute.
    11. Maureen McNichols & Madhav V. Rajan & Stefan Reichelstein, 2014. "Conservatism Correction for the Market-To-Book Ratio and Tobin's q," CESifo Working Paper Series 4626, CESifo Group Munich.
    12. B. Matemilola & A. Bany-Ariffin & W. Azman-Saini, 2012. "Financial Leverage and Shareholder’s Required Returns: Evidence from South Africa Corporate Sector," Transition Studies Review, Springer, Springer, vol. 18(3), pages 601-612, March.


    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


    Access and download statistics


    When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:45:y:2007:i:2:p:427-467. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.