Abstract
Some companies consistently enjoy share prices that exceed book value. Such value creators range from giants like Coca-Cola Co., IBM, and Procter & Gamble to less-known small and medium-sized companies like Pall and Shoney's. Other enterprises trade below book value year after year, in both bear and bull markets. Many managers believe that these differences in price to book ratio do not stem from real differences in competitive performance but rather from the capriciousness of the stock market. Over the long term, the stock market responds rationally to the adoption of business strategies that change the level and quality of a company's future cash flows. Most important, evidence shows that given some exceptions the stock market processes available strategic information efficiently. Accepting this premise has two important implications for managers. The first is that they should not waste their time blaming a share price below book value on the perversity of investors. The second is that they should expect the stock market to look beyond the short term and to recognize strategies that create value.