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Book Value Per Common Share Definition
Book value per common share refers to a technique or formula that the company uses to calculate its per share value concerning ordinary shareholders` equity in the company. In case of dissolution of the company, the book value per common share refers to the remaining amount to be shared by the common shareholders after the liquidation of all assets and payment of all debts.
A Little More on What is Book Value Per Share
The book value per common share is a historical accounting measure that uses the formula below to determine the value of the shareholders in the company.
The measure is given by; Book Value Per Share = (Ordinary Shareholder Equity – Preferred Equity) / Total Outstanding shares.
The numerator figure shows the original amount received by the company after issuing ordinary equity shares which can either increase when the company make profits or decrease when the company make losses or pay out dividends. When the company repurchase its stocks from the market, the total common share counts and the book value decreases. When repurchasing the stocks, the company uses the current market price which has considerable impacts on the book value per common share amount. In most cases, stock repurchase reduces the book value per common shares. On the other hand, the figures used in the denominator are the average number of diluted common shares in the previous year. This considers any additional shares above the basic the basic share count that arise from warrants, preferred shares, stock options, and other convertible instruments.
The Difference Between Market Value per Share and Book Value per Share
In company finance, market value per share and book value per share has several differences. One of the key differences lies in their definitions. The market value per share refers to the current stock price of the company shares; it shows values that the participants in the market are willing to pay for the ordinary shares. On the other hand, the book value per share refers to the differences between the company assets and liabilities. Secondly, the book value per share determined using historical cost technique. On the other hand, the market value per share is calculated using a forward-looking technique that takes into considerations the future earning power of the company. Besides, the difference also arises based on their classification of the transactions provided by the accounting principles and standards. Increase in the company estimated growth, profitability, and safety results into increase in the market value per share. However, it does not have significant effects on the book value per share. The accounting principles used by the company has a significant impact on the book value per share. For example, the American generally accepted accounting principle provides that marketing cost should be expensed thus reducing the book value per share.
References for Book Value Per Share
Academic Research on Book Value Per Share
- Dividends, earnings, and stock prices, Gordon, M. J. (1959). The review of economics and statistics, 99-105. This paper critically evaluates the hypothesis relating to the purchase of shares by deriving the connection between variables that impact the purchase of shares. These hypotheses include; both the dividends and earnings per share, dividend per share and earning per share. The author argues that the investors most commonly the investors forecast the possible future price of the shares when making their purchases. The author also points out that the variation in prices of the common stocks is considered to be one of the interest for the investors.
- Discussion of revalued financial, tangible, and intangible assets: Association with share prices and non-market-based value estimates, Easton, P. D. (1998). Journal of Accounting Research, 36, 235-247. This paper investigates how the revaluation of assets are associated with the prices of shares and valuation of non-market-based firms. The author discovered that revalued tangible, intangible, and financial assets could be value-relevant. The author also points out that the valuation of property, plants and equipment are not consistent. In addition, the value-relevance for plant and equipment are stronger than for property, which suggests that revalued operating assets are more relevant in terms of value. Perhaps amazingly, the market does not differentiate director- and autonomous appraiser-based valuations, dependable on the enhancing value estimates of the director through the use of private information countervailing altering effects related to management discretion.
- Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates, Francis, J., Olsson, P., & Oswald, D. R. (2000). Journal of accounting research, 38(1), 45-70. This paper provides empirical evidence on the basis of relying on the intrinsic value derived from various models. These models include the discounted dividend model, discounted abnormal earnings and discounted free cash flow earnings. The paper further compares the accuracy and give an in-depth explanation of each model used in discounting dividends. The explanation is based on a critical evaluation of each model to arrive at a conclusive answer that gives the best alternative.
- Equity valuation and negative earnings: The role of the book value of equity, Collins, D. W., Pincus, M., & Xie, H. (1999). The Accounting Review, 74(1), 29-61. This study explores and explains the anomalous regarding the negative price‐earnings by using the method of simple earning capitalization for the companies that occur losses. The author hypothesized and discovered that the incorporation of the book value of equity in share valuation removes away the negative relation. Moreover, the study discovered that the simple model of earning capitalization is not correctly specified and the negative earning coefficient of earnings on the small firms depicts misspecification in the model.
- The structure of corporate ownership: Causes and consequences, Demsetz, H., & Lehn, K. (1985). Journal of political economy, 93(6), 1155-117. This paper presents that the structure of corporate ownership differs systematically in various ways that correspond to value maximization. Some of the variables that explain the variations that occur in the structure of ownership for the companies in the same industries include; instability of profit rate, size of the firm and whether the company is regulated utility or not or regulated by the financial institutions. Besides, the variation also depends on the kind of business the firm is carrying out in the industry.
- Combining earnings and book value in equity valuation, Penman, S. H. (1998). Contemporary Accounting Research, 15(3), 291-324. This paper discusses the use of the multiplier to calculate the approximate value of equity both to the earnings and the book value. However, the author revealed that the use of price-to-book or price earning multiplier produces two levels of valuations and the analyst is compelled to combine them into one valuation. The discussion further evaluates the ways of combining the two models and show the factors that cause the variations between the book value over some time.
- Impact of Earnings per share on Market Value of an equity share: An Empirical study in Indian Capital Market., Pushpa Bhatt, P., & Sumangala, J. K. (2012). Journal of Finance, Accounting & Management, 3(2). This study focuses on determining the impacts of earning per share on the market value of equity shares. The article suggests that equity valuation is one of the central issues and a matter of concern not only to the capital marketers but also to the academicians. In the recent past, both the companies and the investors in the stock exchange market consider accounting information available to make the market valuation of equity shares. One of the important accounting variables used by the investors and companies to determine the equity value is earning per share.
- Analysts earnings forecasts and the roles of earnings and book value in equity valuation, Ou, J. A., & Sepe, J. F. (2002). Journal of Business Finance & Accounting, 29(3‐4), 287-316. This study explores the impacts of the degree of association between the current and the expected future earnings concerning book value. The author revealed that the current earning`s relevance-value negatively corresponds with the consensus of the future earnings. The author also revealed that the incremental explanation of the book value for equity price correlate positively with the measurement of the study.
- Earnings, adaptation and equity value, Burgstahler, D. C., & Dichev, I. D. (1997). Accounting review, 187-215. This paper focuses on testing the option-style valuation method that mainly predicts the equity value as a function of convex for both book value and earnings. The convex function in the valuation of the book value and earnings rely on the relative amount of the earnings and the book value. The values of earnings measures how effectively the resources of the firm are used. On the other hand, the book value measures the value of resources of the firm irrespective of the current use of resources of the firm.
- Equity valuation using multiples, Liu, J., Nissim, D., & Thomas, J. (2002). Journal of Accounting Research, 40(1), 135-172. Value performance of various financial drivers determines the impacts of forward earnings on the stock prices. In carrying out this study, the author experienced a 15% pricing errors for the stock prices. Pricing errors are within 15 per cent of stock prices for about half our sample. The study discovered that the measurement of forwarding earnings is followed by a historical measurement of earnings measures.
- The value relevance of earnings and book values in equity valuation: An international perspective‐The case of Kuwait, El Shamy, M. A., & Kayed, M. A. (2005). International Journal of Commerce and Management, 15(1), 68-79. This study examines the book value and the value-relevance of earnings the Kuwaiti accounting system that completely complies with the International Accounting Standards. The applies statistical relationship between the prices of stock and both the value and earnings to evaluate the value relevance of the accounting system. The authors further evaluate the explanatory earnings` powers and the book value. They also examined situations under which the book values or value earnings would explain the variations in the stock prices.