Bridge over ocean
1 November 2001 Financial Analysts Journal Volume 57, Issue 6

The Information Content of the Book-to-Market Ratio

  1. Xavier Garza-Gómez

This article explores whether the correlation between risk and the market value of equity can explain the premium obtained by investment strategies based on the ratio of book value to market value of equity (BV/MV). Using data from the Japanese stock market, I show that the relationship between BV/MV and risk is weak. I find that two factors contribute to this result. First, market value correlates not only with risk but also with variables measuring liquidity and past performance. Second, book value of equity has a strong correlation with financial risk. Overall evidence suggests that the high correlation between book value and risk reduces the role of market value as a risk proxy and makes other information contained in market value appear to be the main source of the BV/MV premium.

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