Where to Find Value on the Balance Sheet

Peter Chinloy, Matthew Imes () and Tilan Tang ()
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Peter Chinloy: Quant Advisors, Washington, DC, USA
Matthew Imes: Stetson University, DeLand, Florida, USA
Tilan Tang: Fox School of Business, Temple University, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 01, 1-24

Abstract: 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.

Keywords: Value premium; cash; value versus growth; trade credit (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219091521500090

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