I'd hereby would like to ask if any of you know whether I should use common equity or the total equity value, when computing monthly BM ratio's as done by Lewellen is his 2015 paper on a cross section of expected stock returns.

Full reference; Lewellen, J. (2015). The cross-section of expected stock returns. Critical Finance Review, 4(1), 1–44. https://doi.org/10.1561/104.00000024

Accessible at; https://faculty.tuck.dartmouth.edu/images/uploads/faculty/jonathan-lewellen/ExpectedStockReturns.pdf

I believe he is only looking at common stocks, yet at the same time to calculate the market value of equity I can only find the shares outstanding of all public shares on a monthly basis in CRSP.

Thank you in advance,

Kind regards, Julien Maas

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    $\begingroup$ Dear mr Cho, first of all thank you for your response. On page 5 he states "My tests use all common stocks on the Center for Research in Security Prices (CRSP) monthly files, merged with accounting data from Compustat". He also states that the sample is all common stocks under most of the tables. $\endgroup$ Nov 9, 2023 at 12:29
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    $\begingroup$ I have not tried using a total value of book equity which includes preferred equity and other claims, since I am trying to use his methodology and apply it to a different dataset and set of signals. So in that sense it's not a real replication which I am attempting, yet more of making use of the same methodology to examine a different set of signals. So there is no way that I can easily see, whether he used common equity or total equity by changing the variable. $\endgroup$ Nov 9, 2023 at 13:03
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    $\begingroup$ I understand. I think I was just confused because of the shares outstanding variable in CRSP (SHROUT), which includes all outstanding public shares according to the description. So for this reason I posted the question here. So in essence to reword the question, it would be does it make sense to use common equity as the book value? Yet after I posted the question, and saw your comment, only then I noticed that in Fama and French 1992, they used the same variable to calculate the market value of equity while using common stock as the book value, so now I think that it does make sense. $\endgroup$ Nov 14, 2023 at 18:35
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    $\begingroup$ I do not know how to close a question on this forum yet, yet I think the question is pretty much anwsered. Unless there's something I missed, I am assuming I can use common stock as the book value and the stock price times the shares outstanding of all public shares for the market value. $\endgroup$ Nov 14, 2023 at 19:07
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    $\begingroup$ If you find an answer of your own question, you're welcome to post it. No problem of that. Example of answering own question at stackoverflow.com/questions/21593/…. Your post might bring other's different suggestion. $\endgroup$
    – Cloud Cho
    Nov 14, 2023 at 19:27

1 Answer 1


Even though he does not state it explicitly, it is likely that he used the value of common equity as the book value of equity.

On page 12, Lewellen states "some studies follow Fama and French (1992) and calculate B/M once a year" and then he says that his measure is computed at the beginning of each month.

If we look at Fama and French 1992, which has the same name as Lewellen's paper, on page 428, they mention that BE/ME is the ratio of the book value of common equity to its market value. And they define Market equity as (a stock price times shares outstanding) on page 427.

Since he uses the shares outstanding from CRSP, and is only looking at common stocks. It makes sense that this would be his definition as well.

Moreover he refers to another study (Rosenberg et al, 1985) that used common equity per share as the book value of equity.

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    $\begingroup$ I fully agree. There's a standard way of calculating book value, see Fama and French (1992, 1993). You start with seq or ceq + pstk or at - lt (in that order of availability). You then add txdb and itcb and subtract preferred stock which is pstkrv or pstkl or pstk (in that order of availability). That is the standard definition. Unless it's explicitly stated otherwise, academics use something like this to calculate the book value of equity. $\endgroup$
    – Kevin
    Dec 10, 2023 at 17:49

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