Value Contributions

When firms increase the size of their net balance sheet, they earn a higher return as value. Value is earned from different holdings. An examination of holdings compares which earn value. Holdings of US traded firms are divided into categories from their balance sheet. As reported on the asset side are cash, receivables, physicals, and intangibles. On the liability side, in order are payables, short- and long-term debt. In value, the sum of book equity is divided by market capitalization. For individual value, each is divided by market capitalization. Then, the return is regressed on the individual values and their interactions. Negative value is when increasing a holding reduces the return. Positive value comes from return increasing with a holding. The rank order of contributors to value, for US firms over 1980–2016, is(short-term debt),receivables,cash,(payables),(long-term debt),physicals,intangibles.Replacing holdings by their risk-weight adjustments and adding up, the resulting book to market has no effect on returns. Returns are fully priced by firms’ balance sheet holdings. The results potentially explain why value or overall book to market fails to outperform growth. Value is a return to holding certain risky holdings. Not all balance sheet holdings are risky.