IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v8y2003i4d10.1023_a1027324317663.html
   My bibliography  Save this article

Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios

Author

Listed:
  • Doron Nissim

    (Columbia University)

  • Stephen H. Penman

    (Columbia University)

Abstract

This paper presents a financial statement analysis that distinguishes leverage that arises in financing activities from leverage that arises in operations. The analysis yields two leveraging equations, one for borrowing to finance operations and one for borrowing in the course of operations. These leveraging equations describe how the two types of leverage affect book rates of return on equity. An empirical analysis shows that the financial statement analysis explains cross-sectional differences in current and future rates of return as well as price-to-book ratios, which are based on expected rates of return on equity. The paper therefore concludes that balance sheet line items for operating liabilities are priced differently than those dealing with financing liabilities. Accordingly, financial statement analysis that distinguishes the two types of liabilities informs on future profitability and aids in the evaluation of appropriate price-to-book ratios.

Suggested Citation

  • Doron Nissim & Stephen H. Penman, 2003. "Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios," Review of Accounting Studies, Springer, vol. 8(4), pages 531-560, December.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:4:d:10.1023_a:1027324317663
    DOI: 10.1023/A:1027324317663
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1023/A:1027324317663
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1023/A:1027324317663?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:8:y:2003:i:4:d:10.1023_a:1027324317663. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.