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Steve Roth's avatar

>book and market value--a financial and a nonfinancial asset respectively.

Interesting. That distinction is confused in G&L/SNAs because those two components are not treated separately. Total market cap is treated as "just another liability" for firms, resulting in negative firms' "NW."

Your approach makes sense because shares' book-value component is represented by an equal offsetting entry on the righthand side of firms' balance sheets. The very definition of a "financial asset." This treatment makes Financial Assets = Liabilities (almost) come true.

But it is not offset by a *liability* on firms' BSs. It's offset by a remainder or righthand-side residual called shareholders' equity (As - Ls). Which is part of *HHs'* net worth. Again, fussy terminology; but...different words for very different things...

Treating shares' (market cap value - book value) discrepancy as a NFA makes some sense, because it is *not* offset on firms' BSs. It's like a NF asset in that sense. It purely arises from accounting markup events external to the firms' BS, based on observed asset market prices. It's unrelated to firms' BSs, in accounting terms.

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Steve Roth's avatar

>book and market value--a financial and a nonfinancial asset respectively.

Interesting. Because shares' book-value component is represented on the righthand side of firms' balance sheets. The very definition of a "financial asset." This treatment makes Financial Assets = Liabilities (almost) come true.

While shares' (market cap value - book value) discrepancy is not offset on firms' BSs. It's like a NF asset in that sense; it purely arises from accounting markup events, based on observed asset market prices. It's unrelated to firms' BSs, in accounting terms.

But to reiterate, the book value component is an asset on shareholders' balance sheets, but it is not offset by a *liability* on firms'. It's offset by a remainder or residual called shareholders' equity. Which is part of HHs' net worth. Again, fussy terminology; but...different words for very different things...

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