The market-to-book value gap and the accounting fallacy
Abstract
Purpose
The purpose of the paper is to offer some advancing in the understanding of the market-to-book value (MBV) gap (or ratio) as the symptom and the metrics for intellectual capital (IC) value, and to discuss the major criticisms against it. The original contribution of the paper lies in developing the analysis of the meaning of the MBV from a theory-of-the-firm perspective. Such an approach is employed to shed light on the two sides of MBV: book and market values.
Design/methodology/approach
The paper reviews research on MBV and the theory of the firm, employing a deductive approach that explores criticisms and advantages of the use of the MBV gap as the symptom and the metrics of IC according to a specific theory of the firm.
Findings
The paper finds that the presumption that an “accounting fallacy” exists, which refers to the gap between market and book values, must be revised depending on the chosen theory of the firm. In fact, depending on the theory of the firm to which IC scholars refer, book value could not necessarily equate to market value, even if the latter was unbiased. Again, market value could not be able to express the value of IC.
Research limitations/implications
Implications of the paper are mainly for improving consistency in research, but they also support practice for consciousness and awareness. Limitations are the following. First, the paper offers an analysis of just three selected theories of the firm. Second, the analysis is based on a deductive reasoning that can be criticised for results even if not for the aim. Third, one could feel that an IC-centred theory of the firm does not yet exist at all.
Practical implications
Once reasons for abandoning the misbelief that accounting standards should be set in order to close the gap are highlighted, research on IC can move towards more appropriate goals. On the basis of the criticism presented in the paper, empirical research, which makes use of market and book data, could be carried out in a much more consistent way in relation to theoretical background. The paper highlights how the use of the MBV approach can lead to mistakes without a clear reference to the theory of the firm.
Originality/value
The paper focuses on the meaning of the MBV from a theory-of-the-firm perspective, assisting the researcher in avoiding potential mistakes and inconsistencies in their work, and also suggesting some consequences on the practice of IC.
Keywords
Acknowledgements
Some of the ideas presented in the paper have been discussed at The 6th Interdisciplinary Workshop on Intangibles, Intellectual Capital & Extra-Financial Information, Catania, Italy, 30 September-1 October 2010; at The 34th Annual Congress of the European Accounting Association, Rome, Italy, 20-22 April 2011; at The Roma III University Workshop on Intangibles, Rome, Italy, 12 April 2011; at the “Innovation in network industries: accounting, economic and regulatory implications” Seminar, Paris, France, 16 March 2011; and at The SASE 23rd Annual Conference, Madrid, 23-25 June 2011. The author thanks participants to the meetings for their helpful insights. The author also acknowledges useful comments by two anonymous referees. As usual, all remaining errors and obscurities are the author's responsibility.
Citation
Marzo, G. (2013), "The market-to-book value gap and the accounting fallacy", Journal of Intellectual Capital, Vol. 14 No. 4, pp. 564-581. https://doi.org/10.1108/JIC-10-2012-0094
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited