The authors investigate whether the ratio of book value to market value serves as a suitable risk measure when using a leverage-based model instead of traditional asset-pricing models. They believe the book-to-market ratio should measure risk because it affects the relationship between financial risk and capital structure. For the base sample composed of companies with positive book values, the authors find that the book-to-market ratio (B/M) not only has the same explanatory power for average returns as financial leverage but also contains some small additional amount of risk information. They find no relationship between average returns and B/M for all-equity-financed companies but an inverse relationship for companies with negative book value of equity.