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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
“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.
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