Get access

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


  • We appreciate comments received at the 2006 Journal of Accounting Research conference, Joseph Piotroski (discussant), Douglas Skinner (editor); seminars at Barclays Global Investors, Columbia University, Dartmouth University, Notre Dame University, RSA Erasmus, SUNY Buffalo, University of Amsterdam, UC Davis, University of New South Wales, University of Pennsylvania, Tilburg University, and the 2005 EFMA annual meeting; and those offered by Andrew Ang, Brad Barber, Peter Easton, Kenneth French, Nicholas Gonedes, Robert Holthausen, Charles Lee, Oliver Li, Tjomme Rusticus, Richard Sansing, Catherine Schrand, Thomas Stober, Phillip Stocken, and Moto Yogo.


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.