What causes a corporation’s market value to be greater than its book value?
One cause of a corporation’s market value being greater than its book value is the accountant’s cost principle. In order for an item to be listed as an asset on a corporation’s balance sheet, the item must have been purchased (or donated). If an item is not listed on the balance sheet as an asset, it will not be included in a corporation’s book value. (A corporation’s book value is the amount of stockholders’ equity reported on the balance sheet, which is the amount of assets reported minus the amount of liabilities reported.)
Often a corporation’s most valuable assets were not purchased and, therefore, will not be reported as assets and will not be included in the corporation’s book value. Think of the late Steve Jobs and the culture he developed at Apple. He and his team, the innovative culture, the wildly successful brand names, etc. could never be listed on the balance sheet as assets nor directly included in the corporation’s book value.
On the other hand, the market does recognize those attributes as being immensely valuable. Hence the corporation’s market value was and is greater than its book value.
Learn more about the Balance Sheet.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the creator and author of all the content found on AccountingCoach.com. You can read 1,500 testimonials praising his ability to explain accounting in a way that anybody can understand.
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