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A New Perspective on the International Evidence Concerning the Book-Price Effect

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  • James Foye
  • Dušan Mramor

Abstract

Finance theory implies equity returns should be positively related to financial leverage. However, a recent article decomposes the book-price ratio into financing and operating components and report a negative association between financial leverage and returns. We shed new light on this puzzle by examining a region in which previous research has established that firms’ financial leverage choices are motivated by factors other than maximizing shareholders’ wealth: we hypothesize that this must be reflected in both how financial leverage is priced and the book-price ratio. We show that the relationship between equity returns and financial leverage for stocks in our sample is indeed very different to the findings of previous research, and this is reflected in the decomposed elements of the book-price ratio.

Suggested Citation

  • James Foye & Dušan Mramor, 2016. "A New Perspective on the International Evidence Concerning the Book-Price Effect," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(10), pages 2348-2363, October.
    • Handle: RePEc:mes:emfitr:v:52:y:2016:i:10:p:2348-2363
    DOI: 10.1080/1540496X.2015.1070630
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    Cited by:

    1. Hartwell, Christopher A. & Malinowska, Anna P., 2019. "Informal institutions and firm valuation," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    2. Kofi Mintah Oware & T. Mallikarjunappa, 2023. "Financial Performance and Gender Diversity: The Moderating and Mediating Effect of CSR Disclosure and Expenditure of Listed Firms in India," Vision, , vol. 27(2), pages 243-255, April.
    3. Foye, James, 2024. "What Determines Equity Returns in Emerging Markets?," CAFE Working Papers 29, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.

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