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Equity Defined

Equity Defined

Equity can mean the following: 1) Fairness (legal context), or 2) Ownership interest (business context).

Article III Courts in the United States are vested with the power of law and equity. The power of equity allows the court to “do what is right” when the law does not provide an adequate remedy.

In the business context, equity simply refers to an ownership interest in a business.

A little bit more about Equity

Owners’s refers to an owner’s interest in the company. In accounting parlance, “owner’s equity” can be measured by deducting total liabilities from the total assets. Owner’s Equity is listed on the right side of balance sheet below the liability section.

The phrase “equity interest” (also called stockholders’ equity) refers to a stockholder’s portion percentage of ownership of the firm.

Equity ownership represents the lowest priority of claim over the assets of company. In case of company liquidation, equity holders are paid at the last after creditors’ claims are met.

Types of Equity

Types of equity may include percentage ownership of a partnership, membership interest or units of a limited liability company, or shares of a corporation. Within these, equity (particularly “preferred equity”) can take on any number of characteristics. It can provide for payment preferences, access to information, voting rights, approval rights, etc.

References for Equity

Academic Research on Equity

  • ●      Conceptualizing, measuring, and managing customer-based brand equity, Keller, K. L. (1993). the Journal of Marketing, 1-22. The author presents a conceptual model of brand equity from the perspective of the individual consumer. Customer-based brand equity is defined as the differential effect of brand knowledge on consumer response to the marketing of the brand. This paper goes on to discuss the issues in building, measuring, and managing customer-based brand equity, as well as propose areas for future research.
  • ●      Corporate governance and equity prices, Gompers, P., Ishii, J., & Metrick, A. (2003). The quarterly journal of economics118(1), 107-156. Shareholder rights vary across firms. Using the incidence of 24 unique governance rules, we construct a “Governance Index” to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.
  • ●      Additional evidence on equity ownership and corporate value, McConnell, J. J., & Servaes, H. (1990). Journal of Financial economics27(2), 595-612. This paper aims to back the hypothesis that corporate value is a function of the structure of equity ownership. This is actualized by examining the relationship between Tobin’s Q and the structure of equity ownership for a sample of 1,173 firms for 1976 and 1,093 firms for 1986.
  • ●      Investor diversification and international equity markets, French, K. R., & Poterba, J. M. (1991).  National Bureau of Economic Research. This paper explores the benefits of international diversification. In this paper, the authors construct new estimates of the international equity portfolio holdings of investors in the U.S., Japan, and Britain.
  • ●      Earnings, book values, and dividends in equity valuation,, Ohlson, J. A. (1995). Contemporary accounting research11(2), 661-687. The paper develops and analyzes a model of a firm’s market value as it relates to contemporaneous and future earnings, book values, and dividends. Two owners’ equity accounting constructs provide the underpinnings of the model: the clean surplus relation applies, and dividends reduce current book value but do not affect current earnings. The model satisfies many appealing properties, and it provides a useful benchmark when one conceptualizes how market value relates to accounting data and other information.
  • ●      Industry costs of equity, Fama, E. F., & French, K. R. (1997). Journal of financial economics43(2), 153-193. This paper analyses the computing error in estimate cost of equity for industries. It goes on to highlight the effect of these accounting errors.
  • ●      Disclosure level and the cost of equity capital, Botosan, C. A. (1997). Accounting review, 323-349. In this paper, the author examines the association between disclosure level and the cost of equity capital by regressing firm-specific estimates of cost of equity capital on market beta, firm size and a self-constructed measure of disclosure level.The author uses samples from 122 manufacturing firms in a 1990 annual report.
  • ●      Managing brand equity., Farquhar, P. H. (1989). Marketing research1(3).
  • ●      The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle, Berger, A. N., & Udell, G. F. (1998). Journal of banking & finance22(6-8), 613-673. This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. It shows the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. It also analyzes a number of research and policy issues, review the literature, and suggest topics for future research.
  • ●      A transaction costs theory of equity joint ventures, Hennart, J. F. (1988). Strategic management journal9(4), 361-374. This paper presents a transaction costs theory of equity joint ventures. It distinguishes between `scale’ and `link’ JVs. Scale JVs arise when parents seek to internalize a failing market, but indivisibilities due to scale or scope economies make full ownership of the relevant assets inefficient. Link JVs result from the simultaneous failing of the markets for the services of two or more assets whenever these assets are firm-specific public goods, and acquisition of the firm holding them would entail significant management costs.
  • ●      Extreme correlation of international equity markets, Longin, F., & Solnik, B. (2001). The journal of finance56(2), 649-676. This article examines the extent to which international securities markets correlate in their movements during volatile times.
  • ●      Foreign speculators and emerging equity markets, Bekaert, G., & Harvey, C. R. (2000). The Journal of Finance55(2), 565-613. This paper proposes a cross‐sectional time‐series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns.

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