A+| A| A-

Why Firms Have Zero Net Worth and Why It Matters

The Wealth of Corporations

“Financial Assets = Liabilities.” It is one of the great accounting-identity truisms of economic understanding both among traditional, mainstream economists, and even (especially) among many heterodox, “accounting based” practitioners. It seems obvious—when a company issues and sells bonds, it posts a liability to its balance sheet; the bond buyers hold financial assets on theirs.1

The problem is that this truism is not even close to true. The most obvious example is corporate equity shares—financial assets by any definition. The asset value of outstanding shares is vastly larger than firms’ book value, shareholders’ equity—the bottom line balancing item on the liability side of firms’ balance sheets. Over the last half century, the market-to-book ratio of the S&P 500 has ranged between 2X and 5X.2 The discrepancy exists even for US Treasury bonds outstanding,3 although it is quite small.

To read the full text Login

Get instant access

New 3 Month Subscription
to Digital Archives at

₹826for India

$50for overseas users

Updated On : 24th Jul, 2020

Comments

(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

On 30 March 2020, the United Nations Conference on Trade and Development (UNCTAD) called for a $2.5 trillion COVID-19 crisis package for...

India’s response to the COVID-19-induced economic crisis is proving to be ineffective. The neo-liberal embrace of monetary measures that infuse...

The Reserve Bank of India’s discussion paper on “Governance in Commercial Banks in India” is refreshing in that it takes an approach to governance...

Whether a black swan or a scapegoat, Covid-19 is an extraordinary event. Declared by the WHO as a pandemic, Covid-19 has given birth to the...

I have had a career that has spanned investment banking, public policy, and academia, in the early phase of my working life.

Even while the effort to resolve the crisis resulting from non-performing assets in the banking sector was underway, India’s financial sector was...

Back to Top