What leads to varying price to book ratios among firms?

The price-to-book (P/B) ratio is a financial metric used to compare a company's market value to its book value, calculated as the market price per share divided by the book value per share. Varying P/B ratios among firms can arise from several factors, one of which is how assets are accounted for on the balance sheet.

When firms use historic cost accounting, assets are recorded at their original purchase price, which may not accurately represent their current market value or economic utility. This can lead to a situation where a company's book value is significantly lower than its actual economic value, particularly if its assets have appreciated or if it has significant growth potential. As a result, the P/B ratio can vary widely, depending on how well the balance sheet reflects the true value of a firm's assets. If the market perceives that the book value fails to encapsulate the present worth of the company's assets, it can lead to a higher or lower P/B ratio compared to other firms that may be using different accounting practices or that have different asset valuations.

Other factors like the inclusion of intangible assets, accounting for market value, and firm size can also influence P/B ratios, but they do not directly address the fundamental issue of how accurately the book value is