No abstract

The book-to-market ratio’s numerator adds assets and liabilities differing in risk. We propose a test for the value premium and its sources. Individual balance sheet holdings are divided by firm size. When associated risk premium coefficients are equal, an overall book-to-market is appropriate. Otherwise, there are different risks in assets and liabilities. For U.S. firms, for four decades since 1980, the excess return is regressed on seven ratios relative to size for cash, receivables, tangibles, intangibles, payables, short and long-term debt, and controls. The seven value premiums are not equal. Firms earn higher returns for cash and receivables and lower for short-term debt. Tangible and intangible assets earn no value premium.

This paper examines the effects of gender board diversity on working capital. The study uses a sample of S&P1500 firms, resulting in 9,157 firm-year observations from 2005 to 2019. Our findings show that greater gender diversity on corporate boards is associated with lower liquidity ratios, including lower non-cash ones. The results are robust to a battery of gender board diversity definitions and to a 2SLS analysis which employs the gender ratio in the county’s population in which the firm is headquartered as an instrumental variable. Based on additional tests of the effects of gender board diversity on managerial efficiency ratios, we conclude that the results are driven by superior monitoring associated with gender diversity on the board.

A procedure confirms whether a return-factor correlation is anomalous or results from endogenous simultaneous-equations bias. The identification strategy sorts the cost of capital components for instruments. In the first stage, the initially found factors are regressed on cost instruments. In the second stage, a confirmed anomaly has predicted value significant in returns and exogenous. Taxes, depreciation and capital structure are strong instruments, affecting 1980–2017 quarterly U.S. stock returns. Size, value and profitability decisions are significant in instruments. Returns increase in fitted profits, but not small size. Actual and predicted values have weaker correlation with returns over time.

Firms with higher book equity relative to market capitalization earn a premium, leading to sorting into value and growth. This sorting implies that any balance sheet additions are risky. This paper provides evidence that what a firm holds on its balance sheet matters, and value occurs with high book-to-market ratios. Each holding relative to firm market capitalization has a risk premium, varying across holdings. Among US firms quarterly for 1980–2016, doubling holdings of cash and receivables relative to market capitalization earn premiums of at least 1%, as does taking on debt. These account for the entire value premium, since physicals, intangibles and payables are not risky. The value premium derives from the composition of the firm’s assets.